Presidential address: Liquidity and price discovery

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 T 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. T develop an asymmetric information asset pricing model that incorporates these effects.