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Distressed sales and liquidity in OTC markets

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  • Selcuk, Cemil

Abstract

We present a stylized model of the over-the-counter (OTC) markets in the tradition of Duffie, Gârleanu, and Pedersen 2005 with three distinctive features: (i) Buyers' willingness to pay is private information. (ii) Dividends depend on the state of the macro economy. (iii) Sellers become financially distressed if they cannot sell for too long. Unlike the existing body of work in this literature the probability of trade is endogenous, which in turn opens the door to many interesting results, such as liquidation sales, predation and boom and bust cycles.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38188.

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Date of creation: 01 Apr 2012
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Handle: RePEc:pra:mprapa:38188

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Keywords: fire sales; predation; liquidity; boom and bust cycles;

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  1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2005. "Predatory Trading," Journal of Finance, American Finance Association, American Finance Association, vol. 60(4), pages 1825-1863, 08.
  2. Ricardo Lagos & Guillaume Rocheteau, 2009. "Liquidity in Asset Markets With Search Frictions," Econometrica, Econometric Society, Econometric Society, vol. 77(2), pages 403-426, 03.
  3. Guillaume Rocheteau & Pierre‐Olivier Weill, 2011. "Liquidity in Frictional Asset Markets," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43, pages 261-282, October.
  4. Pierre-Olivier Weill, 2004. "Liquidity Premia in Dynamic Bargaining Markets," Econometric Society 2004 North American Winter Meetings 648, Econometric Society.
  5. Dmitrios Vayanos, 2004. "Search and Endogenous Concentration of Liquidity in Asset Markets," Econometric Society 2004 North American Winter Meetings 647, Econometric Society.
  6. Ricardo Lagos, 2008. "The Research Agenda: Ricardo Lagos on Liquidity and the Search Theory of Money," EconomicDynamics Newsletter, Review of Economic Dynamics, Review of Economic Dynamics, vol. 10(1), November.
  7. Andrei Shleifer & Robert W. Vishny, 2010. "Fire Sales in Finance and Macroeconomics," NBER Working Papers 16642, National Bureau of Economic Research, Inc.
  8. Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market Liquidity and Funding Liquidity," NBER Working Papers 12939, National Bureau of Economic Research, Inc.
  9. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 972-90, October.
  10. Gara M. Afonso, 2008. "Liquidity and congestion," Staff Reports 349, Federal Reserve Bank of New York.
  11. Joshua D. Coval & Erik Stafford, 2005. "Asset Fire Sales (and Purchases) in Equity Markets," NBER Working Papers 11357, National Bureau of Economic Research, Inc.
  12. Hyun Song Shin & Stephen Morris, 2004. "Liquidity Black Holes," Econometric Society 2004 North American Winter Meetings 644, Econometric Society.
  13. Gabriele Camera & Cemil Selcuk, 2009. "Price Dispersion with Directed Search," Journal of the European Economic Association, MIT Press, MIT Press, vol. 7(6), pages 1193-1224, December.
  14. Lagos, Ricardo & Rocheteau, Guillaume & Weill, Pierre-Olivier, 2011. "Crises and liquidity in over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2169-2205.
  15. Bruce Ian Carlin & Miguel Sousa Lobo & S. Viswanathan, 2007. "Episodic Liquidity Crises: Cooperative and Predatory Trading," Journal of Finance, American Finance Association, American Finance Association, vol. 62(5), pages 2235-2274, October.
  16. Mukarram Attari & Antonio S. Mello & Martin E. Ruckes, 2005. "Arbitraging Arbitrageurs," Journal of Finance, American Finance Association, American Finance Association, vol. 60(5), pages 2471-2511, October.
  17. Todd C. Pulvino, 1998. "Do Asset Fire Sales Exist? An Empirical Investigation of Commercial Aircraft Transactions," Journal of Finance, American Finance Association, American Finance Association, vol. 53(3), pages 939-978, 06.
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