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Why do markets freeze?

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  • Philip Bond
  • Yaron Leitner
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    Abstract

    Consider the sale of mortgages by a loan originator to a buyer. As widely noted, such a transaction is subject to a severe adverse selection problem: the originator has a natural information advantage and will attempt to sell only the worst mortgages. However, a second important feature of this transaction has received much less attention: both the seller and the buyer may have existing inventories of mortgages similar to those being sold. The authors analyze how the presence of such inventories affects trade. They use their model to discuss implications for regulatory intervention in illiquid markets.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 09-24.

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    Date of creation: 2009
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    Handle: RePEc:fip:fedpwp:09-24

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    Keywords: Mortgage loans;

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    References

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    1. Adam B. Ashcraft & Til Schuermann, 2008. "Understanding the securitization of subprime mortgage credit," Staff Reports, Federal Reserve Bank of New York 318, Federal Reserve Bank of New York.
    2. Douglas W. Diamond & Raghuram G. Rajan, 2009. "Fear of Fire Sales and the Credit Freeze," NBER Working Papers 14925, National Bureau of Economic Research, Inc.
    3. Acharya, Viral V. & Gale, Douglas M & Yorulmazer, Tanju, 2009. "Rollover Risk and Market Freezes," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7122, C.E.P.R. Discussion Papers.
    4. Guillaume Plantin & Haresh Sapra & Hyun Song Shin, 2008. "Marking-to-Market: Panacea or Pandora's Box?," Journal of Accounting Research, Wiley Blackwell, Wiley Blackwell, vol. 46(2), pages 435-460, 05.
    5. Allen, Franklin & Carletti, Elena, 2006. "Mark-to-market accounting and liquidity pricing," CFS Working Paper Series, Center for Financial Studies (CFS) 2006/17, Center for Financial Studies (CFS).
    6. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports, Federal Reserve Bank of New York 328, Federal Reserve Bank of New York.
    7. Easley, David & O'Hara, Maureen, 2010. "Liquidity and valuation in an uncertain world," Journal of Financial Economics, Elsevier, Elsevier, vol. 97(1), pages 1-11, July.
    8. Samuelson, William F, 1984. "Bargaining under Asymmetric Information," Econometrica, Econometric Society, Econometric Society, vol. 52(4), pages 995-1005, July.
    9. Heaton, John C. & Lucas, Deborah & McDonald, Robert L., 2010. "Is mark-to-market accounting destabilizing? Analysis and implications for policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(1), pages 64-75, January.
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