Advanced Search
MyIDEAS: Login to save this paper or follow this series

Market run-ups, market freezes, inventories, and leverage

Contents:

Author Info

  • Philip Bond
  • Yaron Leitner
Registered author(s):

    Abstract

    This paper supersedes Working Paper No. 12-8.> We study trade between an informed seller and an uninformed buyer who have existing inventories of assets similar to those being traded. We show that these inventories may lead to prices that increase even absent changes in fundamentals (a .run-up.), but may also make trade impossible (a .freeze.) and hamper information dissemination. Competition may amplify the run-up by inducing buyers to enter loss-making trades at high prices to prevent a competitor from purchasing at a lower price and releasing bad news about inventory values. Inventories also prevent seller competition from delivering the Bertrand outcome, in which prices match sellers’ valuations. We discuss both empirical implications and implications for regulatory intervention in illiquid markets.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2013/wp13-14.pdf
    Download Restriction: no

    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2013/wp13-14R.pdf
    File Function: Full text
    Download Restriction: no

    Bibliographic Info

    Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 13-14.

    as in new window
    Length:
    Date of creation: 2013
    Date of revision: 04 Feb 2014
    Handle: RePEc:fip:fedpwp:13-14

    Contact details of provider:
    Postal: 10 Independence Mall, Philadelphia, PA 19106-1574
    Web page: http://www.philadelphiafed.org/
    More information through EDIRC

    Order Information:
    Email:
    Web: http://www.phil.frb.org/econ/wps/index.html

    Related research

    Keywords: Mortgages ; Markets ; Inventories ; Trade;

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, Elsevier, vol. 9(1), pages 47-73, March.
    2. Kremer, Ilan & Skrzypacz, Andrzej, 2007. "Dynamic signaling and market breakdown," Journal of Economic Theory, Elsevier, Elsevier, vol. 133(1), pages 58-82, March.
    3. Chris Downing & Dwight Jaffee, 2009. "Is the Market for Mortgage-Backed Securities a Market for Lemons?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(7), pages 2257-2294, July.
    4. Glode, V. & Green, R.C. & Lowery, R., 2010. "Financial Expertise as an Arms Race," Discussion Paper, Tilburg University, Center for Economic Research 2010-87S, Tilburg University, Center for Economic Research.
    5. Lasse H. Pedersen & Markus Brunnermeier, 2004. "Predatory Trading," Econometric Society 2004 North American Winter Meetings, Econometric Society 425, Econometric Society.
    6. Mark Grinblatt & Chuan Yang Hwang, . "Signalling and the Pricing of Unseasoned New Issues," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 01-89, Wharton School Rodney L. White Center for Financial Research.
    7. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-29.
    8. Brendan Daley & Brett Green, 2012. "Waiting for News in the Market for Lemons," Econometrica, Econometric Society, Econometric Society, vol. 80(4), pages 1433-1504, 07.
    9. Itay Goldstein & Alexander Guembel, 2008. "Manipulation and the Allocational Role of Prices," Review of Economic Studies, Oxford University Press, Oxford University Press, vol. 75(1), pages 133-164.
    10. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
    11. Oliver Faltin-Traeger & Kathleen W. Johnson & Christopher Mayer, 2010. "Issuer Credit Quality and the Price of Asset Backed Securities," American Economic Review, American Economic Association, American Economic Association, vol. 100(2), pages 501-05, May.
    12. Amihud, Yakov & Mendelson, Haim, 1980. "Dealership market : Market-making with inventory," Journal of Financial Economics, Elsevier, Elsevier, vol. 8(1), pages 31-53, March.
    13. Manaster, Steven & Mann, Steven C, 1996. "Life in the Pits: Competitive Market Making and Inventory Control," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 9(3), pages 953-75.
    14. Grinblatt, Mark & Hwang, Chuan Yang, 1989. " Signalling and the Pricing of New Issues," Journal of Finance, American Finance Association, American Finance Association, vol. 44(2), pages 393-420, June.
    15. Bisin, Alberto & Guaitoli, Danilo, 1998. "Moral Hazard and Non-Exclusive Contracts," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1987, C.E.P.R. Discussion Papers.
    16. Andrea Attar & Thomas Mariotti & Francois Salanie, 2009. "Non-Exclusive Competition in the Market for Lemons," LERNA Working Papers, LERNA, University of Toulouse 09.13.289, LERNA, University of Toulouse.
    17. Ho, Thomas S Y & Stoll, Hans R, 1983. " The Dynamics of Dealer Markets under Competition," Journal of Finance, American Finance Association, American Finance Association, vol. 38(4), pages 1053-74, September.
    18. Allen, Franklin & Faulhaber, Gerald R., 1989. "Signalling by underpricing in the IPO market," Journal of Financial Economics, Elsevier, Elsevier, vol. 23(2), pages 303-323, August.
    19. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
    20. Laurence Ales & Pricila Maziero, 2009. "Adverse Selection and Non-Exclusive Contracts," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2010-E61, Carnegie Mellon University, Tepper School of Business.
    21. ehiel, Philippe & Benny Moldovanu & Ennio Stacchetti, 1994. "How (not) to sell nuclear weapons," Discussion Paper Serie B, University of Bonn, Germany 288, University of Bonn, Germany.
    22. John M. Griffin & Dragon Yongjun Tang, 2012. "Did Subjectivity Play a Role in CDO Credit Ratings?," Journal of Finance, American Finance Association, American Finance Association, vol. 67(4), pages 1293-1328, 08.
    23. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports, Federal Reserve Bank of New York 328, Federal Reserve Bank of New York.
    24. Ashcraft, A. & Goldsmith-Pinkham, P. & Vickery, J., 2010. "MBS Ratings and the Mortgage Credit Boom," Discussion Paper, Tilburg University, Center for Economic Research 2010-89S, Tilburg University, Center for Economic Research.
    25. Samuelson, William F, 1984. "Bargaining under Asymmetric Information," Econometrica, Econometric Society, Econometric Society, vol. 52(4), pages 995-1005, July.
    26. Douglas W. Diamond & Raghuram G. Rajan, 2011. "Fear of Fire Sales, Illiquidity Seeking, and Credit Freezes," The Quarterly Journal of Economics, Oxford University Press, Oxford University Press, vol. 126(2), pages 557-591.
    27. 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.
    28. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1343-66, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:13-14. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Beth Paul).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.