Self-fulfilling liquidity dry-ups
AbstractSecondary markets for long-term assets might be illiquid due to adverse selection. In a model in which moral hazard is confined to project initiation, I find that: (1) when agents expect a liquidity dry-up on such markets, they optimally choose to self-insure through the hoarding of non-productive but liquid assets; (2) such a response has negative externalities as it reduces ex-post market participation, which worsens adverse selection and dries up market liquidity; (3) liquidity dry-ups are Pareto inefficient equilibria; (4) the Government can rule them out. Additionally, when agents face idiosyncratic, privately known, illiquidity shocks, I show that: (5) it increases market liquidity; (6) illiquid agents are better-off when they can credibly disclose their liquidity position, but transparency has an ambiguous effect on risk-sharing possibilities.
Download InfoIf 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.
Bibliographic InfoPaper provided by National Bank of Belgium in its series Working Paper Research with number 185.
Length: 44 pages
Date of creation: Mar 2010
Date of revision:
Contact details of provider:
Postal: Boulevard de Berlaimont 14, B-1000 Bruxelles
Phone: (+ 32) (0) 2 221 25 34
Fax: (+ 32) (0) 2 221 31 62
Web page: http://www.nbb.be
More information through EDIRC
Liquidity; Liquidity Dry-ups; Financial Crises; Hoarding; Adverse Selection; Self-insurance;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G01 - Financial Economics - - General - - - Financial Crises
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-13 (All new papers)
- NEP-CTA-2010-03-13 (Contract Theory & Applications)
- NEP-FDG-2010-03-13 (Financial Development & Growth)
- NEP-IAS-2010-03-13 (Insurance Economics)
- NEP-MAC-2010-03-13 (Macroeconomics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Vives, Xavier, 2011.
"Strategic Complementarity, Fragility, and Regulation,"
CEPR Discussion Papers
8444, C.E.P.R. Discussion Papers.
- Xavier Vives, 2011. "Strategic Complementarity, Fragility, and Regulation," CESifo Working Paper Series 3507, CESifo Group Munich.
- Xavier Vives, 2012. "Strategic Complementarity, Fragility, and Regulation," 2012 Meeting Papers 789, Society for Economic Dynamics.
- Vives, Xavier, 2011. "Strategic complementarity, fragility, and regulation," IESE Research Papers D/928, IESE Business School.
- Douglas Gale & Tanju Yorulmazer, 2011.
FMG Discussion Papers
dp682, Financial Markets Group.
- Thierfelder, Felix, 2012. "Maturity shortening and market failure," Discussion Papers 06/2012, Deutsche Bundesbank, Research Centre.
- Mit, 2010. "Lemons, Market Shutdowns and Learning," 2010 Meeting Papers 1098, Society for Economic Dynamics.
- Bertsch, Christoph, 2013. "A detrimental feedback loop: deleveraging and adverse selection," Working Paper Series 277, Sveriges Riksbank (Central Bank of Sweden).
- Yorulmazer, Tanju, 2014. "Literature review on the stability of funding models," Economic Policy Review, Federal Reserve Bank of New York, issue Feb, pages 3-16.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.