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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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Bibliographic Info

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, 2004. "Predatory Trading," NBER Working Papers 10755, National Bureau of Economic Research, Inc.
  2. Ricardo Lagos & Guillaume Rocheteau, 2008. "Liquidity in asset markets with search frictions," Staff Report, Federal Reserve Bank of Minneapolis 408, Federal Reserve Bank of Minneapolis.
  3. Stephen Morris & Hyun Song Shin, 2004. "Liquidity Black Holes," Yale School of Management Working Papers, Yale School of Management ysm425, Yale School of Management.
  4. 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.
  5. Afonso, Gara, 2011. "Liquidity and congestion," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 20(3), pages 324-360, July.
  6. Camera, Gabriele & Selcuk, Cemil, 2004. "Price Dispersion with Directed Search," Purdue University Economics Working Papers 1173, Purdue University, Department of Economics.
  7. Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market Liquidity and Funding Liquidity," NBER Working Papers 12939, National Bureau of Economic Research, Inc.
  8. 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.
  9. Coval, Joshua & Stafford, Erik, 2007. "Asset fire sales (and purchases) in equity markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 86(2), pages 479-512, November.
  10. Andrei Shleifer & Robert Vishny, 2011. "Fire Sales in Finance and Macroeconomics," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 25(1), pages 29-48, Winter.
  11. Dimitri Vayanos & Tan Wang, 2004. "Search and endogenous concentration of liquidity in asset markets," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 455, London School of Economics and Political Science, LSE Library.
  12. Lagos, Ricardo & Rocheteau, Guillaume & Weill, Pierre-Olivier, 2011. "Crises and liquidity in over-the-counter markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 146(6), pages 2169-2205.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. Weill, Pierre-Olivier, 2008. "Liquidity premia in dynamic bargaining markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 140(1), pages 66-96, May.
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