INFORMATION, LIQUIDITY, AND ASSET TRADING IN A RANDOM MATCHING GAME

This paper develops a sequential random matching model of asset tradin g to analyze how the extent of information about an asset that is avai lable in the market can affect its tradeability. Liquidity traders are rational agents with higher impatience, which make optimal intertempo ral consumption decisions given the trading constraints. Information a symmetries result in unexecuted trades. Agents who want to consume rel atively early optimally choose to exchange initial assets for new asse ts that have lower expected payoff but are more liquid in subsequent t rading. These assets have a lower expected rate or return (i.e., a liq uidity premium) and higher trading volume. (C) 1996 Academic Press, In c.