Endogenous liquidity and contagion
AbstractMarket liquidity is typically characterized by a number of ad hoc metrics, such as depth, volume, bid-ask spreads etc. No general coherent denition seems to exist, and few attempts have been made to justify the existing metrics on welfare grounds. In this paper we propose a welfare-based denition of liquidity and characterize its relationship to the usual proxies. Our analysis rests on a general equilibrium model with multiple assets and restricted investor participation. Strategic intermediaries pursue prot opportunities by providing intermediation services (i.e. "liquidity") in exchange for an endogenous fee. Our model is well-suited to study the contagion-like eects of liquidity shocks.
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Bibliographic InfoPaper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 29300.
Length: 38 pages
Date of creation: 2009
Date of revision:
Liquidity; intermediation; arbitrage; segmented markets; contagion;
Other versions of this item:
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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