Presenter: Ji Hee Yoon, University College London

Title: The Reversal of the Price-Liquidity Relationship in the OTC market

Abstract: In a search-based trading model, we uncover how assets with identical fundamentals can exhibit a liquidity premium or its reversal. As trading focuses on the more liquid asset, liquidity naturally diverges. When buyers dominate, a liquidity premium arises, reflecting immediacy versus trading gains. Conversely, increased selling prompts sellers to seek higher prices for illiquid assets, reversing the liquidity premium. Our model unifies liquidity spread dynamics in normal and crisis periods, suggesting that supporting the illiquid market paradoxically benefits the liquid market, correcting the reversed liquidity premium.

Host: Gyuri Venter