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Liquidity and fire sales

Author

Listed:
  • David L. Kelly
  • Stephen F. LeRoy

Abstract

A ?fire sale? occurs when the owner of a good offers it for sale at a price strictly below the price that some buyers would willingly pay for the good. He does so because the advantage of the quick sale made possible by the lower price outweighs the higher price that other potential buyers would pay, given the likely delay in locating these buyers in the latter case. Fire sales can occur only in illiquid markets. This paper generalizes earlier treatments of illiquid markets by assuming that the asset can be offered for sale at any time, rather than only after its owner loses his capacity to operate it profitably. Also, it specifies that profitability follows a random walk.

Suggested Citation

  • David L. Kelly & Stephen F. LeRoy, 2005. "Liquidity and fire sales," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 249-270.
    • Handle: RePEc:fip:fedgpr:y:2005:p:249-270
    as

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    File URL: http://www.federalreserve.gov/events/conferences/mmp2004/pdf/kelly-leroy.pdf
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    References listed on IDEAS

    as
    1. Shleifer, Andrei & Vishny, Robert W, 1992. "Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
    2. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    3. David Kelly & Stephen LeRoy, 2007. "Liquidity and Liquidation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(3), pages 553-572, June.
    4. Todd C. Pulvino, 1998. "Do Asset Fire Sales Exist? An Empirical Investigation of Commercial Aircraft Transactions," Journal of Finance, American Finance Association, vol. 53(3), pages 939-978, June.
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    Cited by:

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    2. Badea Irina - Raluca, 2015. "Hrm - Well-Being At Work Relation. A Case Study," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 4, pages 146-154, August.

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    Keywords

    Liquidity (Economics); Econometric models;

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