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Liquidity and the Threat of Fraudulent Assets

  • Yiting Li
  • Guillaume Rocheteau
  • Pierre-Olivier Weill

We study an over-the-counter (OTC) market in which the usefulness of assets as a means of payment or collateral is limited by the threat of fraudulent practices. Agents can produce fraudulent assets at a positive cost, which generates upper bounds on the quantity of each asset that can be traded in the OTC market. Each of these endogenous, asset-specific, resalability constraints depends on the cost of fraud, on the frequency of trade, and on the asset price. In equilibrium, assets are partitioned into three liquidity tiers, which differ in their resalability, prices, haircuts, sensitivity to shocks, and responses to policies.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/668864
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File URL: http://www.jstor.org/stable/full/10.1086/668864
Download Restriction: Access to the online full text or PDF requires a subscription.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 120 (2012)
Issue (Month): 5 ()
Pages: 000 - 000

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Handle: RePEc:ucp:jpolec:doi:10.1086/668864
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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