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Experimental Evidence on the 'Insidious' Illiquidity Risk

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Author Info

  • Damien Besancenot

    ()
    (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234)

  • Radu Vranceanu

    ()
    (Economics Department - ESSEC Business School)

Abstract

This paper brings experimental evidence on investors' behavior subject to an "illiquidity" constraint, where the success of a risky project depends on the participation of a minimum number of investors. The experiment is set up as a frameless coordination game that replicates the investment context. Results confirm the insidious nature of the illiquidity risk: as long as a first illiquidity default does not occur, investors do not seem able to fully internalize it. After several defaults, agents manage to coordinate on a default probability above which they refuse to participate to the project. This default probability is lower than the default probability of the first illiquidity default.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number hal-00607867.

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Date of creation: 01 Jun 2011
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Handle: RePEc:hal:journl:hal-00607867

Note: View the original document on HAL open archive server: http://hal-essec.archives-ouvertes.fr/hal-00607867
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Related research

Keywords: Coordination game ; Illiquidity risk ; Threshold strategy ; Experimental economics;

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  1. Besancenot, Damien & Vranceanu, Radu, 2009. "Banks’ risk race: a signaling explanation," ESSEC Working Papers DR 09007, ESSEC Research Center, ESSEC Business School.
  2. Frank Heinemann, 2000. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 316-318, March.
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  7. Besancenot, Damien & Huynh, Kim & Vranceanu, Radu, 2004. "Default on sustainable public debt: illiquidity suspect convicted," Economics Letters, Elsevier, vol. 82(2), pages 205-211, February.
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  14. Damien Besancenot & Radu Vranceanu, 2007. "Financial Instability under a Flexible Exchange Rate," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 291-302, 06.
  15. Viktoriya Semeshenko & Alexis Garapin & Bernard Ruffieux & Mirta Gordon, 2010. "Information-driven coordination: experimental results with heterogeneous individuals," Theory and Decision, Springer, vol. 69(1), pages 119-142, July.
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