Chapter 19

Market Liquidity—Theory and Empirical Evidence *

Dimitri Vayanosa and Jiang Wangb

aDimitri Vayanos, Department of Finance, London School of Economics, London WC2A 2AE, United Kingdom, CEPR and NBER

bSloan School of Management, Massachusetts Institute of Technology, Cambridge MA 02142, USA, CAFR and NBER,


In this paper we survey the theoretical and empirical literatures on market liquidity. We organize both literatures around three basic questions: (a) how to measure illiquidity, (b) how illiquidity relates to underlying market imperfections and other asset characteristics, and (c) how illiquidity affects expected asset returns. Using a unified model from Vayanos and Wang (2010), we survey theoretical work ...

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