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Title: Opacity and Liquidity

Author(s): André Stenzel and Wolf Wagner

Publication Date: June 2015

Keyword(s): asset liquidity, endogenous information acquisition and opacity

Programme Area(s): Financial Economics

Abstract: We present a model that links the opacity of an asset to its liquidity. While low opacity assets are liquid, intermediate levels of opacity provide incentives for investors to acquire private information, causing adverse selection and illiquidity. High opacity, however, benefits liquidity by reducing the value of a unit of private information to investors. The cross-section of bid-ask spreads of U.S. firms is shown to be consistent with this hump-shape relationship between opacity and illiquidity. The analysis suggests that uniform disclosure requirements may not be desirable; optimal information provision can be achieved by subsidizing information. The model also delivers predictions about when it is optimal for asset originators to sell intransparent products or pools composed of correlated assets.

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Bibliographic Reference

Stenzel, A and Wagner, W. 2015. 'Opacity and Liquidity'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10665