The Fragility of Discretionary Liquidity Provision: Lessons from the Collapse of the Auction Rate Securities Market
We study the fragility of discretionary liquidity provision by major financial intermediaries during systemic events. The laboratory of our study is the recent collapse of the auction rate securities (ARS) market. Using a comprehensive dataset constructed from auction reports and intraday transactions data on municipal ARS, we present quantitative evidence that auction dealers acted at their own discretion as "market makers" before the market collapsed. We show that this discretionary liquidity provision greatly affected both net investor demand and auction clearing rates. Importantly, such discretionary liquidity provision is fragile. As auction dealers suffered losses from other financial markets and faced increasing inventory pressure, they stopped making markets. Moreover, the drop in support occurred suddenly, apparently triggered by the unexpected withdrawal of one major broker-dealer.
|Date of creation:||Feb 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (852)2878 1978
Fax: (852)2878 7006
Web page: http://www.hkimr.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Viral V. Acharya & Philipp Schnabl & Gustavo Suarez, 2010.
"Securitization without risk transfer,"
NBER Working Papers
15730, National Bureau of Economic Research, Inc.
- Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
- Detragiache, Enrica & Garella, Paolo & Guiso, Luigi, 1997. "Multiple Versus Single Banking Relationships," CEPR Discussion Papers 1649, C.E.P.R. Discussion Papers.
- Richard C. Green & Burton Hollifield & Norman Schürhoff, 2005.
"Financial Intermediation and the Costs of Trading in an Opaque Market,"
FAME Research Paper Series
rp130, International Center for Financial Asset Management and Engineering.
- Richard C. Green & Burton Hollifield & Norman Schurhoff, . "Financial Intermediation and the Costs of Trading in an Opaque Market," GSIA Working Papers 2004-11, Carnegie Mellon University, Tepper School of Business.
- Covitz, Daniel & Liang, Nellie & Suarez, Gustavo, 2009. "The anatomy of a financial crisis: the evolution of panic-driven runs in the asset-backed commercial paper market," Proceedings, Federal Reserve Bank of San Francisco, issue Jan, pages 1-36.
- Brunnermeier, Markus K & Pedersen, Lasse Heje, 2007.
"Market Liquidity and Funding Liquidity,"
CEPR Discussion Papers
6179, C.E.P.R. Discussion Papers.
- Lasse Heje Pederson & Markus K Brunnermeier, 2007. "Market Liquidity and Funding Liquidity," FMG Discussion Papers dp580, Financial Markets Group.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market Liquidity and Funding Liquidity," NBER Working Papers 12939, National Bureau of Economic Research, Inc.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market liquidity and funding liquidity," LSE Research Online Documents on Economics 24478, London School of Economics and Political Science, LSE Library.
- Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
- LiCalzi, Marco & Pavan, Alessandro, 2005.
"Tilting the supply schedule to enhance competition in uniform-price auctions,"
European Economic Review,
Elsevier, vol. 49(1), pages 227-250, January.
- Marco LiCalzi & Alessandro Pavan, 2002. "Tilting the Supply Schedule to Enhance Competition in Uniform- Price Auctions," Game Theory and Information 0210003, EconWPA.
- Marco LiCalz & Alessandro Pavan, 2002. "Tilting the Supply Schedule to Enhance Competition on Uniform-Price Auctions," Discussion Papers 1495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Marco LiCalzi & Alessandro Pavan, 2003. "Tilting the Supply Schedule to Enhance Competition in Uniform-Price Auctions," Working Papers 2003.22, Fondazione Eni Enrico Mattei.
- Green, Richard C. & Hollifield, Burton & Schurhoff, Norman, 2007.
"Dealer intermediation and price behavior in the aftermarket for new bond issues,"
Journal of Financial Economics,
Elsevier, vol. 86(3), pages 643-682, December.
- Richard Green & Burton Hollifield & Norman Schurhoff, . "Dealer Intermediation and Price Behavior in the Aftermarket for New Bond Issues," GSIA Working Papers 2005-E56, Carnegie Mellon University, Tepper School of Business.
- Damianov, Damian S., 2005. "The uniform price auction with endogenous supply," Economics Letters, Elsevier, vol. 88(2), pages 152-158, August.
- de Bandt, Olivier & Hartmann, Philipp, 2000.
"Systemic Risk: A Survey,"
CEPR Discussion Papers
2634, C.E.P.R. Discussion Papers.
- McAdams, David, 2007. "Adjustable supply in uniform price auctions: Non-commitment as a strategic tool," Economics Letters, Elsevier, vol. 95(1), pages 48-53, April.
- Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
When requesting a correction, please mention this item's handle: RePEc:hkm:wpaper:052011. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (HKIMR)
If references are entirely missing, you can add them using this form.