Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality
AbstractWe develop a dynamic equilibrium model of asset markets with adverse selection. There exists a unique equilibrium in which better quality assets trade at higher prices but with a lower price-dividend ratio in less liquid markets. Sellers of high-quality assets signal quality by accepting a lower trading probability. We show how the distribution of sellers' private information affects an asset's price and liquidity, how a change in that distribution can cause a fire sale and a flight to quality, and how asset purchase and subsidy programs may raise prices and liquidity and reverse the flight to quality.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 104 (2014)
Issue (Month): 7 (July)
Other versions of this item:
- Veronica Guerrieri & Robert Shimer, 2012. "Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality," NBER Working Papers 17876, National Bureau of Economic Research, Inc.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Briana Chang, 2011. "Adverse Selection and Liquidity Distortion in Decentralized Markets," Discussion Papers 1513, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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2011 Meeting Papers
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NBER Working Papers
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"Markets with Multidimensional Private Information,"
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210, Society for Economic Dynamics.
- Yiting Li & Guillaume Rocheteau & Pierre-Olivier Weill, 2012.
"Liquidity and the Threat of Fraudulent Assets,"
Journal of Political Economy,
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- Yiting Li & Guillaume Rocheteau & Pierre-Olivier Weill, 2011. "Liquidity and the Threat of Fraudulent Assets," NBER Working Papers 17500, National Bureau of Economic Research, Inc.
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- Wei Cui & Sören Radde, 2014. "Search-Based Endogenous Illiquidity and the Macroeconomy," Discussion Papers of DIW Berlin 1367, DIW Berlin, German Institute for Economic Research.
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