Financial assets and liquidity
Week 6
Allen and Gale Ch 2, 3.1 and 3.3
Financial assets
Intro
Financial assets - a claim of ownership or contract to get future payments
• Eg. bank deposits, stocks, bonds and money
• Unlike physical goods, they do not necessarily have physical value or physical form
Why they, and secondary markets, are needed:
• Liquidation needs (timing of consumption) are uncertain
• Illiquidity, the asset may not be helpful for consumption
• Heterogeneity in the consumer’s valuation of the assets
IN
TOINVEST THEM
HOW
1 directfromissuercompany 2 assetm arketbuyf romorexchangewith
a nother
consumer
3 banksbuythrough intermediaries 4 Abenchmark asocialplannerb uysfromtheissuerandallocatestoallc onsum
Regulator’s objectives:
• E ciency
• Stability
These align with the objectives of private agents, as although their priority is pro t, if the market is
unstable consumers will be aware which will drive down their pro ts
Week 6
Allen and Gale Ch 2, 3.1 and 3.3
Financial assets
Intro
Financial assets - a claim of ownership or contract to get future payments
• Eg. bank deposits, stocks, bonds and money
• Unlike physical goods, they do not necessarily have physical value or physical form
Why they, and secondary markets, are needed:
• Liquidation needs (timing of consumption) are uncertain
• Illiquidity, the asset may not be helpful for consumption
• Heterogeneity in the consumer’s valuation of the assets
IN
TOINVEST THEM
HOW
1 directfromissuercompany 2 assetm arketbuyf romorexchangewith
a nother
consumer
3 banksbuythrough intermediaries 4 Abenchmark asocialplannerb uysfromtheissuerandallocatestoallc onsum
Regulator’s objectives:
• E ciency
• Stability
These align with the objectives of private agents, as although their priority is pro t, if the market is
unstable consumers will be aware which will drive down their pro ts
