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Liquidity and the Threat of Fraudulent Assets

Author Info

Listed author(s):
  • Yiting Li
  • Guillaume Rocheteau
  • Pierre-Olivier Weill

Abstract

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://dx.doi.org/10.1086/668864
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File URL: http://dx.doi.org/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

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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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Find related papers by JEL classification:
  • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
  • G1 - Financial Economics - - General Financial Markets
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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  18. Kenneth A. Snowden, 2010. "Covered Farm Mortgage Bonds in the Late Nineteenth Century U.S," NBER Working Papers 16242, National Bureau of Economic Research, Inc.
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  20. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, Oxford University Press, vol. 125(1), pages 307-362.
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