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[Book] Market Liquidity: Theory, Evidence, and Policy, by Thierry Foucault

17 June 2013

Thierry Foucault, Professor, Finance department, wrote a new book titled Market Liquidity: Theory, Evidence, and Policy  and co-authored with Marco Pagano and Ailsa Röell. They draw on a vast body of theoretical insights and empirical findings on security price formation that have accumulated in the last thirty years, and have come to form a well-defined field within financial economics known as 'market microstructure.'

 The way in which securities are traded is very different from the idealized picture of a frictionless and self-equilibrating market offered by the typical finance textbook. Market Liquidity offers a more accurate and authoritative take on liquidity and price discovery.

The authors draw on a vast body of theoretical insights and empirical findings on security price formation that have accumulated in the last thirty years, and have come to form a well-defined field within financial economics known as 'market microstructure.' Focusing on liquidity and price discovery, they analyze the tension between the two, pointing out that when price-relevant information reaches the market through trading pressure rather than through a public announcement, liquidity suffers.

The book also confronts many puzzling phenomena in securities markets and uses the analytical tools and empirical methods of market microstructure to understand them. These include issues such as why liquidity changes over time, why large trades move prices up or down, and why these price changes are subsequently reversed, why we see concentration of securities trading, why some traders willingly disclose their intended trades while others hide them, and why we observe temporary deviations from arbitrage prices.

Thierry Foucault, Marco Pagano, and Ailsa Röell, Market Liquidity. Theory, Evidence, and Policy , Oxford University Press, 2013


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