Contents
Figures ....................................................................................................................... XIX
Tables ..................................................................................................................... XXIII
Abbreviations .......................................................................................................... XXV
Symbols .................................................................................................................. XXIX
Introduction ................................................................................................................... 1
Why liquidity? ............................................................................................................ 1
Goals of the Analysis .................................................................................................. 2
Structure of the Analysis ............................................................................................ 4
Chapter 1: The Concept of Liquidity .......................................................................... 9
1.1. Definition of Liquidity ..................................................................................... 10
1.1.1. Review of Liquidity Definitions ............................................................... 10
1.1.1.1. Asset Liquidity .................................................................................. 13
1.1.1.2. Market Liquidity ............................................................................... 18
1.1.1.3. Corporate Liquidity........................................................................... 25
1.1.1.4. Relations between the Notions of Liquidity ..................................... 27
1.1.2. Liquidity Risk ........................................................................................... 29
1.1.2.1. Liquidity Risk of Privately Traded Assets ........................................ 29
1.1.2.2. Liquidity Risk in Public Markets ...................................................... 32
1.1.3. A Two-Dimensional Definition of Liquidity ........................................... 36
1.2. Sources of Liquidity ......................................................................................... 40

1.2.1. Preliminary Considerations ...................................................................... 41
1.2.2. Transaction and Opportunity Costs .......................................................... 44
1.2.2.1. Commissions and Taxes ................................................................... 44
1.2.2.2. Indirect Transaction Costs ................................................................ 48
1.2.2.3. Opportunity Costs ............................................................................. 51
1.2.3. Market Organization and the Search for a Trading Partner ..................... 55
1.2.3.1. Forms of Market Organization ......................................................... 55
1.2.3.2. Market Organization, Search, and Liquidity .................................... 59
1.2.4. Diversity of Valuations ............................................................................. 64
1.3. Review of Illiquid Assets ................................................................................. 73
1.3.1. Characteristics of Illiquid Assets .............................................................. 74
1.3.2. Real Estate ................................................................................................ 76
1.3.3. Private Equity ........................................................................................... 81
1.3.4. Alternative Investments ............................................................................ 84
1.4. Economic Relevance of Liquidity ................................................................... 88
1.4.1. Money and Liquidity Preference .............................................................. 88
1.4.2. Liquidity in Investment Decisions ............................................................ 92
1.4.2.1. Investment Goals .............................................................................. 92
1.4.2.2. Expected and Unexpected Liquidation ............................................. 98
1.4.2.3. Liquidity in the Sale Case and in the Purchase Case ...................... 100
1.4.2.4. Individual Liquidity and Portfolio Liquidity .................................. 102
Chapter 2: Search in Illiquid Markets .................................................................... 105
2.1. The Theory of Search..................................................................................... 106

2.2. Introduction to Search Models ....................................................................... 110
2.2.1. Search Framework .................................................................................. 110
2.2.2. Search Strategy ....................................................................................... 114
2.2.3. Basic Search Model ................................................................................ 116
2.2.4. Karlin’s Model........................................................................................ 121
2.3. The Real Estate Search Model ....................................................................... 123
2.3.1. Framework Modifications ...................................................................... 124
2.3.1.1. Distribution of Offers...................................................................... 125
2.3.1.2. Continuous Time ............................................................................. 126
2.3.1.3. Opportunity Cost and Discounting ................................................. 128
2.3.1.4. Rental Revenues .............................................................................. 129
2.3.1.5. Market Uncertainty ......................................................................... 131
2.3.1.6. The Relative Approach ................................................................... 135
2.3.2. Model Design ......................................................................................... 137
2.3.3. Limitations and Possible Extensions ...................................................... 142
2.3.3.1. Bounded Search Horizon ................................................................ 143
2.3.3.2. Dynamic Market ............................................................................. 146
2.3.3.3. Unknown Offer Distribution and Learning .................................... 149
2.3.3.4. Offer Recalls ................................................................................... 152
2.3.3.5. Intensity of Search .......................................................................... 153
2.3.3.6. Listing Price .................................................................................... 154
2.3.3.7. Search for the Best Seller ................................................................ 156
2.3.4. MCS Solution ......................................................................................... 158
2.3.5. Liquidity within the Model ..................................................................... 163
2.4. Search and the Functioning of Illiquid Markets ............................................ 166