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

  • Francisco Peñaranda
  • Jón Daníelsson

We develop a coordination game to model interactions between fundamentals and liquidity during unstable periods in financial markets. We then propose a flexible econometric framework for estimation of the model and analysis of its quantitative implications. The specific empirical application is carry trades in the yen–dollar market, including the turmoil of 1998. We find a generally very deep market, with low information disparities amongst agents. We observe occasionally episodes of market fragility, or turmoil with up by the escalator, down by the elevator patterns in prices. The key role of strategic behavior in the econometric model is also confirmed.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1003.

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Date of creation: Jan 2007
Date of revision: Mar 2010
Handle: RePEc:upf:upfgen:1003
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
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  9. Nikola A. Tarashev, 2003. "Currency Crises and the Informational Role of Interest Rates," BIS Working Papers 135, Bank for International Settlements.
  10. Tauchen, George E. & Gallant, A. Ronald, 1995. "Which Moments to Match," Working Papers 95-20, Duke University, Department of Economics.
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  12. Chernov, Mikhail & Ghysels, Eric, 2000. "A study towards a unified approach to the joint estimation of objective and risk neutral measures for the purpose of options valuation," Journal of Financial Economics, Elsevier, vol. 56(3), pages 407-458, June.
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  21. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
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