In this paper we survey the theoretical and empirical literature 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...

We develop a model of financially constrained arbitrage, and use it to study the dynamics of arbitrage capital, liquidity, and asset prices. Arbitrageurs exploit price discrepancies between assets traded in segmented markets, and in doing so provide liquidity to investors. A collateral...

We analyze the role of benchmarks in over-the-counter markets subject to search frictions. The publication of a benchmark can, under conditions, raise total social surplus by (i) increasing the volume of beneficial trade, (ii) facilitating more efficient trade matching between dealers and...

Recent scandals over the manipulation of LIBOR and foreign exchange benchmarks have spurred policy discussions of the appropriate design of financial benchmarks. We solve a version of the problem faced by a financial benchmark administrator. Acting as a mechanism designer, the benchmark...

We extend Kyle's (1985) model of insider trading to the case where liquidity provided by noise traders follows a general stochastic process. Even though the level of noise trading volatility is observable, in equilibrium, measured price impact is stochastic. If noise trading volatility is...

We study a model where some agents have private information about risky asset returns and trade to obtain capital gains, while others acquire the risky asset and hold it to maturity, forming expectations of returns based on market prices. We show that under such a structure, in addition to fully...

Borrowing decisions affect most households, with large stakes and implications for subfields as varied as macroeconomics and industrial organization. I review theoretical and empirical work on household debt: its prevalence, level, growth, and composition, as well as various measures of consumer...

Heightened counterparty risk during the recent financial crisis has raised questions about the role clearinghouses play in global financial stability. Empirical identification of the effect of centralized clearing on counterparty risk is challenging because of the co-incidence of macro-economic...

We investigate the leverage of hedge funds in the time series and cross section. Hedge fund leverage is counter-cyclical to the leverage of listed financial intermediaries and decreases prior to the start of the financial crisis in mid-2007. Hedge fund leverage is lowest in early 2009 when the...

Collateralized debt obligations (CDOs) and private-label mortgage-backed securities (MBS) backed by nonprime loans played a central role in the recent financial crisis. Little is known, however, about the underlying forces that drove investor demand for these securitizations. Using micro-data on...