Why do markets freeze?
AbstractConsider 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 InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 09-24.
Date of creation: 2009
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-31 (All new papers)
- NEP-MIC-2009-10-31 (Microeconomics)
- NEP-RMG-2009-10-31 (Risk Management)
- NEP-URE-2009-10-31 (Urban & Real Estate Economics)
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