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On the impact of fundamentals, liquidity and coordination on market stability

Listed author(s):
  • Jon Danielsson
  • Francisco Penaranda

Complex interactions between fundamentals and liquidity during unstable periods in financial markets are succinctly modeled with coordination games. We propose a flexible framework to estimate such a model and use the efficient method of moments as estimation procedure. We illustrate the model by using exchange rates from the yen–dollar carry trade induced uncertainty in 1998, interest rate spreads and global market volatility. The model fits the data well, with evidence of low information disparities, the market is generally very deep, where global volatility is more important than fundamental uncertainty in the determination of liquidity. There is clear evidence of asymmetry between the buy and sell sides of the market.

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File URL: http://eprints.lse.ac.uk/24480/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24480.

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Length: 35 pages
Date of creation: Jan 2007
Handle: RePEc:ehl:lserod:24480
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  27. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
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