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Market run-ups, market freezes, and leverage

Author

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  • Philip Bond
  • Yaron Leitner

Abstract

The authors study trade between a buyer and a seller when both may have existing inventories of assets similar to those being traded. They analyze how these inventories affect trade, information dissemination, and price formation. The authors show that when the buyer's and seller's initial leverage is moderate, inventories increase price and trade volume, but when leverage is high, trade may become impossible (a \"market freeze\"). Their analysis predicts a pattern of trade in which prices and trade volume first increase, and then markets break down. The authors use their model to discuss implications for regulatory intervention in illiquid markets. ; Superseded by Working Paper 12-8

Suggested Citation

  • Philip Bond & Yaron Leitner, 2010. "Market run-ups, market freezes, and leverage," Working Papers 10-36, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:10-36
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    Keywords

    Inventories; Trade; Markets;
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