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On The Impact Of Fundamentals, Liquidity, And Coordination On Market Stability

  • Jón Daníelsson
  • Francisco Peñaranda

Complex interactions between fundamentals and liquidity during unstable periods in financial markets are succinctly modeled with coordination games. We propose a flexible framework to estimate such a model and use the efficient method of moments as estimation procedure. We illustrate the model by using exchange rates from the yen–dollar carry trade induced uncertainty in 1998, interest rate spreads and global market volatility. The model fits the data well, with evidence of low information disparities, the market is generally very deep, where global volatility is more important than fundamental uncertainty in the determination of liquidity. There is clear evidence of asymmetry between the buy and sell sides of the market.

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File URL: http://hdl.handle.net/10.1111/j.1468-2354.2011.00642.x
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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 52 (2011)
Issue (Month): 3 (08)
Pages: 621-638

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Handle: RePEc:ier:iecrev:v:52:y:2011:i:3:p:621-638
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