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Rev Fin 1991; 4:417-441
© 1991 the Society for Financial Studies

Article

Risk aversion, market liquidity, and price efficiency

A Subrahmanyam
Graduate School of Business, Columbia University, New York, NY 10027, USA

Abstract

A model of a noncompetitive speculative market is analyzed in which privately informed traders and market makers are risk averse. Market liquidity is found to nonmonotonic in the number of informed traders, their degree of risk aversion, and the precision of their information. It is also shown that increased liquidity trading leads to reduced priced efficiency, and that, under endogenous information acquisition, market liquidity may also be nonmonotonic in the variance of liquidity trades.


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