Contagious Adverse Selection
AbstractWe illustrate the corrosive effect of even small amounts of adverse selection in an asset market and show how it can lead to the total breakdown of trade. The problem is the failure of "market confidence," defined as approximate common knowledge of an upper bound on expected losses. Small probability events can unravel market confidence. We discuss the role of contagious adverse selection and the problem of "toxic assets" in the recent financial crisis. (JEL D82, G01, G12, G14)
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Journal: Macroeconomics.
Volume (Year): 4 (2012)
Issue (Month): 1 (January)
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G01 - Financial Economics - - General - - - Financial Crises
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Diego Moreno & John Wooders, 2012.
"Dynamic markets for lemons : performance, liquidity, and policy intervention,"
Economics Working Papers
we1226, Universidad Carlos III, Departamento de Economía.
- Diego Moreno & John Wooders, 2013. "Dynamic Markets for Lemons: Performance, Liquidity, and Policy Intervention," Working Paper Series 5, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
- Grzegorz Hałaj & Christoffer Kok, 2013.
"Assessing interbank contagion using simulated networks,"
Computational Management Science,
Springer, vol. 10(2), pages 157-186, June.
- Hałaj, Grzegorz & Kok, Christoffer, 2013. "Assessing interbank contagion using simulated networks," Working Paper Series 1506, European Central Bank.
- Timothy Shields & Baohua Xin, 2012. "Higher-order Beliefs in Simple Trading Models," Working Papers 12-18, Chapman University, Economic Science Institute.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros) or (Michael P. Albert).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.