Presidential Address: Liquidity and Price Discovery


  • Maureen O'Hara

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    • Johnson Graduate School of Management, Cornell University. I would like to thank David Easley, Franklin Allen, Campbell Harvey, Gideon Saar, and John Campbell for helpful comments.


This paper examines the implications of market microstructure for asset pricing. I argue that asset pricing ignores the central fact that asset prices evolve in markets. Markets provide liquidity and price discovery, and I argue that asset pricing models need to be recast in broader terms to incorporate the transactions costs of liquidity and the risks of price discovery. I argue that symmetric information-based asset pricing models do not work because they assume that the underlying problems of liquidity and price discovery have been solved. I develop an asymmetric information asset pricing model that incorporates these effects.