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Market opacity and fragility: Why liquidity evaporates when it is most needed

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  • Cespa, Giovanni
  • Vives, Xavier

Abstract

Lack of market transparency can make liquidity demand upward sloping, inducing strategic complementarity and multiple equilibria, by impairing the liquidity provision of non-standard liquidity suppliers. Then an initial dearth of liquidity may degenerate into a liquidity rout (as in a “flash crash†) and traders faced with the largest cost of trading are those trading more intensely at equilibrium. An increase in order flow transparency and/or in the mass of dealers who are in the market at all times has a positive impact on total welfare.

Suggested Citation

  • Cespa, Giovanni & Vives, Xavier, 2016. "Market opacity and fragility: Why liquidity evaporates when it is most needed," CEPR Discussion Papers 11732, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:11732
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    Cited by:

    1. Yuzhakov, Vladimir (Южаков, Владимир) & Startsev, Yaroslav (Старцев, Ярослав), 2017. "Diagnostics of Development Situations in Public Administration [Диагностика Ситуаций Развития В Государственном Управлении]," Working Papers 031724, Russian Presidential Academy of National Economy and Public Administration.
    2. Zhou, Hao & Elliott, Robert J. & Kalev, Petko S., 2019. "Information or noise: What does algorithmic trading incorporate into the stock prices?," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 27-39.

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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