UC Riverside

Asset liquidity, crucial for understanding asset pricing anomalies and the transmission mechanism of monetary policy, is significantly interacted with information frictions among market participants. Employing the New-Monetarist framework pioneered by Lagos and Wright (2005) and Rocheteau and Wright (2005), this dissertation comprises three essays investigating the presence and acquisition of private information and its impact on asset liquidity. Chapter 1 provides an overview.

Chapter 2 explores the implications of private information acquisition for asset liquidity within a New-Monetarist model. The model incorporates a bargaining protocol with private information and strategic information acquisition decisions, revealing how economic fundamentals and monetary policy influence private information acquisition. A non-monotonic effect of nominal interest rates on asset liquidity is identified, with insights applied to interpret the 2007-2008 financial crisis.

Chapter 3 extends the model to account for hidden information status in real-world markets. This chapter uncovers strategic behaviors among dealers under hidden information status, leading to equilibrium configurations characterized by separating, semi-pooling, and pooling equilibria. Notably, a non-monotonic response of private information acquisition to monetary policy emerges, contrasting with Chapter 2.

With the rising portion of international investment executed by portfolio managers, Chapter 4 addresses the home bias puzzle in international finance literature by considering the influence of delegated portfolio management on international portfolio allocation strategies. Furthermore, I discuss the future research agenda and the development of the existing literature.