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

Listed author(s):
  • Jón Daníelsson
  • Francisco Peñaranda

We develop a coordination game to model interactions between fundamentals and liquidity during unstable periods in financial markets. We then propose a flexible econometric framework for estimation of the model and analysis of its quantitative implications. The specific empirical application is carry trades in the yen–dollar market, including the turmoil of 1998. We find a generally very deep market, with low information disparities amongst agents. We observe occasionally episodes of market fragility, or turmoil with up by the escalator, down by the elevator patterns in prices. The key role of strategic behavior in the econometric model is also confirmed.

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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
DOI: j.1468-2354.2011.00642.x
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