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Market run-ups, market freezes, and leverage

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  • Philip Bond
  • Yaron Leitner

Abstract

The 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 ; Superseded by Working Paper 12-8

Suggested Citation

  • Philip Bond & Yaron Leitner, 2010. "Market run-ups, market freezes, and leverage," Working Papers 10-36, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:10-36
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    References listed on IDEAS

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    Cited by:

    1. Jason Allen & James Chapman & Federico Echenique & Matthew Shum, 2016. "Efficiency And Bargaining Power In The Interbank Loan Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(2), pages 691-716, May.
    2. Yaron Leitner, 2011. "Why do markets freeze?," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 12-19.

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    Keywords

    Inventories; Trade; Markets;
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