Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality
AbstractWe develop a dynamic equilibrium model of asset markets affected by adverse selection. There exists a unique equilibrium where better assets trade at higher prices but in less liquid markets. Sellers of high-quality assets can separate because they are more willing to accept a lower trading probability. As a result, the emergence of adverse selection generates a drop in liquidity. It may also lead to a decline in the price-dividend ratio—a fire sale—and a flight to quality. Subsidies to purchasing assets may be Pareto improving and can reverse the fire sale and flight to quality.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17876.
Date of creation: Mar 2012
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- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
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- Yiting Li & Guillaume Rocheteau & Pierre-Olivier Weill, 2011.
"Liquidity and the threat of fraudulent assets,"
1124, Federal Reserve Bank of Cleveland.
- Yiting Li & Guillaume Rocheteau & Pierre-Olivier Weill, 2012. "⊇↛Liquidity and the Threat of Fraudulent Assets," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 000 - 000.
- Robert Shimer & Veronica Guerrieri, 2013. "Markets with Multidimensional Private Information," 2013 Meeting Papers 210, Society for Economic Dynamics.
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