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A Tale of Fire-Sales and Liquidity Hoarding

Author

Listed:
  • Aleksander Berentsen
  • Benjamin Müller

Abstract

We extend the analysis of the theoretical interbank market model of Gale and Yorulmazer (2013) by introducing randomized trading (lotteries). In contrast to Gale and Yorulmazer, we find that fire-sale asset prices are efficient and that no liquidity hoarding occurs in equilibrium with lotteries. While Gale and Yorulmazer find that the market provides insufficient liquidity, we find that it provides too much liquidity when introducing lotteries. We also show how to decentralize the efficient lottery mechanism.

Suggested Citation

  • Aleksander Berentsen & Benjamin Müller, 2017. "A Tale of Fire-Sales and Liquidity Hoarding," Working Papers 2017-16, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2017-16
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    File URL: https://www.snb.ch/en/publications/research/working-papers/2017/working_paper_2017_16
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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