Critical Finance Review > Vol 8 > Issue 1-2

Economics with Market Liquidity Risk

Viral V. Acharya, New York University, Stern School of Business, USA, , Lasse Heje Pedersen, AQR Capital Management, Copenhagen Business School, NYU, and CEPR, Denmark,
Suggested Citation
Viral V. Acharya and Lasse Heje Pedersen (2019), "Economics with Market Liquidity Risk", Critical Finance Review: Vol. 8: No. 1-2, pp 111-125.

Publication Date: 17 Dec 2019
© 2019 Viral V. Acharya and Lasse Heje Pedersen
JEL codes: E44E52G01G12G30H12
Liquidity riskAsset pricingCorporate financeCrisesMacroeconomicsMonetary policy


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In this article:
1. Introduction 
2. Asset Pricing with Market Liquidity Risk 
3. Investment Management with Market Liquidity Risk 
4. Corporate Finance with Market Liquidity Risk 
5. Banking with Market Liquidity Risk 
6. Financial Crises and Market Liquidity Risk 
7. Macroeconomics, Monetary, and Fiscal Policy with Market Liquidity Risk 
8. Other Areas of Economics: Labor and Beyond 
9. Conclusion: Liquidity Risk Handcuffs the Invisible Hand 


For markets to work efficiently, buyers and sellers must be able to transact easily. People must have access to a marketplace such as a supermarket or a stock exchange with adequate liquidity. Further, people must have confidence that such a well-functioning marketplace will also exist in the future. Market liquidity risk is the risk that the market will function poorly in the future, handcuffing the “invisible hand” through which markets produce allocative efficiency. We discuss the effects of market liquidity risk on asset pricing, investment management, corporate finance, banking, financial crises, macroeconomics, monetary policy, fiscal policy, and other economic areas.