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Vanishing Liquidity, Market Runs,and the Welfare Impact of TARP

Author

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  • Christian EWERHART

    (University of Zurich and NCCR Finrisk)

Abstract

I model a financial market that dries out in the wake of premature liquidations. Two main results are obtained. First, liquidity may vanish even if small, riskneutral buyers could easily compensate the ongoing selling. Thus, more markets are vulnerable to “runs” than suggested by previous work. Second, the scale of premature liquidations is not informative about welfare losses. In fact, market runs may be nearly constrained efficient. The latter finding might suggest an explanation for the recent policy turn of the U.S. Treasury concerning purchases of troubled assets under the Emergency Economic Stabilization Act of 2008 (EESA).

Suggested Citation

  • Christian EWERHART, "undated". "Vanishing Liquidity, Market Runs,and the Welfare Impact of TARP," Swiss Finance Institute Research Paper Series 09-01, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp0901
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    File URL: http://ssrn.com/abstract=1343773
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    More about this item

    Keywords

    Liquidity; inventory; market run; welfare; TARP;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • N2 - Economic History - - Financial Markets and Institutions

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