Learning from Prices , Liquidity Spillovers , and Market Segmentation ∗

  title={Learning from Prices , Liquidity Spillovers , and Market Segmentation ∗},
  author={Giovanni Cespa and Thierry Foucault},
We describe a new mechanism that explains the transmission of liquidity shocks from one security to another (“liquidity spillovers”). Dealers use prices of other securities as a source of information. As prices of less liquid securities convey less precise information, a drop in liquidity for one security raises the uncertainty for dealers in other securities, thereby affecting their liquidity. The direction of liquidity spillovers is positive if the fraction of dealers with price information… CONTINUE READING

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