AbstractLiquidity, defined as the ease with which an asset may be marketed, has a self-fulfilling dimension. If investors in the primary market for a new asset fear an illiquid secondary market, the issuance does not take off thereby vindicating the initial concern about an illiquid secondary market. The fear of future illiquidity suffices to trigger current illiquidity.� The purpose of this paper is to outline a simple model of self-fulfilling liquidity.It develops an issuance model where (i) investors are not financially con-strained and (ii) have no market power, (iii) there are no transaction costs and (iv) none withholds private information. Interestingly, assets are illiquid in this frictionless world because of coordination failure among investors.There is room for coordination failure only because investors fear a future adverse selection discount if the issuance does not take off but there is no informational concern, neither as the issuance takes place, nor in the secondary market at the equilibria.� Illiquidity as a coordination failure is su.cient to predict stylized facts regarding the design and diffusion of financial innovations, without invoking the much stronger informational imperfections required in the existing literature.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp448.
Date of creation: Apr 2003
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- Stephen Morris & Hyun Song Shin, 2004.
"Liquidity Black Holes,"
Yale School of Management Working Papers
ysm425, Yale School of Management.
- Hyun Song Shin & Stephen Morris, 2004. "Liquidity Black Holes," Econometric Society 2004 North American Winter Meetings 644, Econometric Society.
- Stephen Morris & Hyun Song Shin, 2003. "Liquidity Black Holes," Cowles Foundation Discussion Papers 1434, Cowles Foundation for Research in Economics, Yale University.
- Hyun Song Shin & Stephen Morris, 2004. "Liquidity Black Holes," Econometric Society 2004 North American Winter Meetings 620, Econometric Society.
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