Liquidity and Financial Market Runs
AbstractWe model a run on a financial market, in which each risk-neutral investor fears having to liquidate shares after a run, but before prices can recover back to fundamental values. To avoid having to possibly liquidate shares at the marginal postrun price-in which case the risk-averse market-making sector will already hold a lot of share inventory and thus be more reluctant to absorb additional shares-each investor may prefer selling today at the average in-run price, thereby causing the run itself. Liquidity runs and crises are not caused by liquidity shocks per se, but by the fear of future liquidity shocks. © 2004 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
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Bibliographic InfoArticle provided by MIT Press in its journal The Quarterly Journal of Economics.
Volume (Year): 119 (2004)
Issue (Month): 1 (February)
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