Liquidity, runs, and security design: lessons from the collapse of the auction rate municipal bond market
AbstractIn this paper, we use the recent collapse of the ARS market as a case study on important issues regarding fragility of financial innovations and systemic risks. We find strong evidence of investor runs for liquidity, partly caused by a self-fulfilling panic. In addition, coordination failures triggered by an unexpected first mover led all major broker-dealers to simultaneously withdraw their liquidity support. We also find that the likelihood of auction failures and ARS reset rates depend significantly on both the rule and the level of maximum auction rates; that, as predicted by auction theories, there is also strong evidence for underpricing after dealers with-drew their liquidity supports; and that inter-auction secondary market liquidity may encourage aggressive bidding that increases the reset rates.
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Bibliographic InfoArticle provided by Federal Reserve Bank of San Francisco in its journal Proceedings.
Volume (Year): (2009)
Issue (Month): Jan ()
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- Kjell G. Nyborg, 2004.
"Multiple Unit Auctions and Short Squeezes,"
Review of Financial Studies,
Society for Financial Studies, vol. 17(2), pages 545-580.
- Marco LiCalzi & Alessandro Pavan, 2002.
"Tilting the Supply Schedule to Enhance Competition in Uniform- Price Auctions,"
Game Theory and Information
- LiCalzi, Marco & Pavan, Alessandro, 2005. "Tilting the supply schedule to enhance competition in uniform-price auctions," European Economic Review, Elsevier, vol. 49(1), pages 227-250, January.
- Marco LiCalz & Alessandro Pavan, 2002. "Tilting the Supply Schedule to Enhance Competition on Uniform-Price Auctions," Discussion Papers 1495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Marco LiCalzi & Alessandro Pavan, 2003. "Tilting the Supply Schedule to Enhance Competition in Uniform-Price Auctions," Working Papers 2003.22, Fondazione Eni Enrico Mattei.
- Damianov, Damian S., 2005. "The uniform price auction with endogenous supply," Economics Letters, Elsevier, vol. 88(2), pages 152-158, August.
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