Market run-ups, market freezes, and leverage
AbstractThe authors study trade between a buyer and a seller when both may have existing inventories of assets similar to those being traded. They analyze how these inventories affect trade, information dissemination, and price formation. The authors show that when the buyer's and seller's initial leverage is moderate, inventories increase price and trade volume, but when leverage is high, trade may become impossible (a "market freeze"). Their analysis predicts a pattern of trade in which prices and trade volume first increase, and then markets break down. The authors use their model to discuss implications for regulatory intervention in illiquid markets. ; Superseded by Working Paper 12-8
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Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 10-36.
Date of creation: 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-03 (All new papers)
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