The Role of Trading Frictions in Real Asset Markets

48 Pages Posted: 1 Aug 2007 Last revised: 20 Jul 2010

See all articles by Alessandro Gavazza

Alessandro Gavazza

London School of Economics & Political Science (LSE) - Department of Economics

Date Written: November 30, 2008

Abstract

Almost all real assets trade in decentralized markets, where trading frictions could inhibit the efficiency of asset allocations and depress asset prices. In this paper, I use data on commercial aircraft markets to empirically investigate whether trading frictions vary with the size of the asset market. Intuitively, it is more difficult to sell assets that have a thin market. As a result, firms find it optimal to hold on longer to assets with a thinner market in case their profitability rises in the future. Thus, when markets for firms' assets are thin, firms' average productivity and capacity utilization are lower, and the dispersions of productivity and of capacity utilization are higher. In turn, prices of assets with a thin market are, on average, lower and have a higher dispersion, since prices depend on firms' productivity and capacity utilization.

The empirical analysis confirms that trading frictions vary with the size of the market, as aircraft with a thinner market have: 1) lower turnover; 2) lower capacity utilization; 3) higher dispersion of utilization levels; 4) lower mean prices; and 5) higher dispersion of transaction prices.

Keywords: Decentralized Markets, Search, Real Assets, Liquidity, Aircraft

JEL Classification: G34, D24, D83, E22

Suggested Citation

Gavazza, Alessandro, The Role of Trading Frictions in Real Asset Markets (November 30, 2008). Available at SSRN: https://ssrn.com/abstract=1003998 or http://dx.doi.org/10.2139/ssrn.1003998

Alessandro Gavazza (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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