Hong, Jieying and Pouget, Sébastien (2021) Liquidity formation and preopening periods in financial markets. Economica, vol. 88 (n° 351). pp. 697-723.

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Identification Number : 10.1111/ecca.12366


This paper studies the role of preopening periods in liquidity formation and welfare in financial markets. Because no transaction occurs during these preopening periods, their economic significance could be questioned. We model a market where costly participation and asymmetric information prevent latent liquidity from being expressed. At equilibrium, risk-averse insiders use preopening periods to better coordinate supply and demand of liquidity by communicating liquidity needs, thus improving welfare. Partial or full communication of private signals by the insider with the asset at preopening periods does not always enhance liquidity formation, but improves welfare through reducing adverse selection risk faced by the outsider, and increasing the likelihood of her entry. Our findings have implications for portfolio management and the design of financial markets.

Item Type: Article
Language: English
Date: July 2021
Refereed: Yes
Place of Publication: London
Uncontrolled Keywords: Asymmetric Information, Liquidity Formation, Preopening Periods
JEL Classification: D82 - Asymmetric and Private Information
G14 - Information and Market Efficiency; Event Studies
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 13 Jan 2022 14:49
Last Modified: 19 Jan 2022 08:35
OAI Identifier: oai:tse-fr.eu:126367
URI: https://publications.ut-capitole.fr/id/eprint/44174

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