We provide a model that links an asset's market liquidity - i.e., the ease with which it is traded - and traders' funding liquidity - i.e., the ease with which they can obtain funding. Traders provide market liquidity, and their ability to do so depends on their availability of funding....

This paper describes the relationship between bounded rationality and risk aversion. It shows athat bounded rationality increases risk aversion at the reference income level and that there exists an income level below the reference income level where bounded rationality reduces risk aversion and...

This survey summarises the recent theoretical developments in understanding price processes. After introducing the rational expectations equilibria (REE) concept the limitations of this approach are shown. We illustrate the relationship between partially-revealing REE and incomplete markets and...

This paper considers a two country economy similar to that in Obstfeld and Rogoff (1995). We build on their model by distinguishing between sticky retail prices, sticky wholesale prices and sticky wages. We find that conclusions about whether monetary shocks lead to exchange rate overshooting...

A trader who receives a signal about a future public announcement can exploit this private information twice. First, when he receives his signal, and second, at the time of the public announcement. The second round advantage occurs because the early-informed trader can best infer the extent to...

This paper introduces a tractable, structural model of subjective beliefs. Since agents that plan for the future care about expected future utility flows, current felicity can be increased by believing that better outcomes are more likely. On the other hand, expectations that are biased towards...

We use a rational expectations model to examine how public disclosure requirements affect listing decisions by rent-seeking corporate insiders, and allocation decisions by liquidity traders seeking a minimize trading costs. We find that exchanges competing for trading volume engage in a ¶race...

We present a model in which an asset bubble can persist despite the presence of rational arbitrageurs. The resilience of the bubble stems from the inability of arbitrageurs to temporarily coordinate their selling strategies. This synchronization problem together with the individual incentive to...

A reduction in inflation can fuel run-ups in housing prices if people suffer from money illusion. For example, investors who decide whether to rent or buy a house by simply comparing monthly rent and mortgage payments do not take into account that inflation lowers future real mortgage costs. We...