IDEAS home Printed from https://ideas.repec.org/a/ier/iecrev/v52y2011i3p621-638.html
   My bibliography  Save this article

On The Impact Of Fundamentals, Liquidity, And Coordination On Market Stability

Author

Listed:
  • Jón Daníelsson
  • Francisco Peñaranda

Abstract

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jón Daníelsson & Francisco Peñaranda, 2011. "On The Impact Of Fundamentals, Liquidity, And Coordination On Market Stability," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(3), pages 621-638, August.
    • Handle: RePEc:ier:iecrev:v:52:y:2011:i:3:p:621-638
    DOI: j.1468-2354.2011.00642.x
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/j.1468-2354.2011.00642.x
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/j.1468-2354.2011.00642.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290, World Scientific Publishing Co. Pte. Ltd..
    2. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
    3. Amihud, Yakov & Mendelson, Haim & Pedersen, Lasse Heje, 2006. "Liquidity and Asset Prices," Foundations and Trends(R) in Finance, now publishers, vol. 1(4), pages 269-364, February.
    4. Aleh Tsyvinski & Arijit Mukherji & Christian Hellwig, 2006. "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, American Economic Association, vol. 96(5), pages 1769-1787, December.
    5. Jeanne, Olivier & Masson, Paul, 2000. "Currency crises, sunspots and Markov-switching regimes," Journal of International Economics, Elsevier, vol. 50(2), pages 327-350, April.
    6. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    7. Sanford J. Grossman & Merton H. Miller, 1988. "Liquidity and Market Structure," NBER Working Papers 2641, National Bureau of Economic Research, Inc.
    8. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
    9. Nikola A. Tarashev, 2003. "Currency Crises and the Informational Role of Interest Rates," BIS Working Papers 135, Bank for International Settlements.
    10. Gallant, A. Ronald & Tauchen, George, 2002. "Simulated Score Methods and Indirect Inference for Continuous-time Models," Working Papers 02-09, Duke University, Department of Economics.
    11. Stephen Morris & Hyun Song Shin, 2004. "Liquidity Black Holes," Review of Finance, European Finance Association, vol. 8(1), pages 1-18.
    12. Iván Werning & George-Marios Angeletos, 2006. "Crises and Prices: Information Aggregation, Multiplicity, and Volatility," American Economic Review, American Economic Association, vol. 96(5), pages 1720-1736, December.
    13. 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.
    14. Chung, Chae-Shick & Tauchen, George, 2001. "Testing Target-Zone Models Using Efficient Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 255-269, July.
    15. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
    16. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
    17. repec:bla:jfinan:v:43:y:1988:i:3:p:617-37 is not listed on IDEAS
    18. Foster, F Douglas & Viswanathan, S, 1995. "Can Speculative Trading Explain the Volume-Volatility Relation?," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 379-396, October.
    19. Chernozhukov, Victor & Hong, Han, 2003. "An MCMC approach to classical estimation," Journal of Econometrics, Elsevier, vol. 115(2), pages 293-346, August.
    20. Mr. M. Sbracia & Mr. Alessandro Prati, 2002. "Currency Crises and Uncertainty About Fundamentals," IMF Working Papers 2002/003, International Monetary Fund.
    21. Jón Daníelsson & Richard Payne, 2012. "Liquidity determination in an order-driven market," The European Journal of Finance, Taylor & Francis Journals, vol. 18(9), pages 799-821, October.
    22. Gallant, A. Ronald & Tauchen, George, 1996. "Which Moments to Match?," Econometric Theory, Cambridge University Press, vol. 12(4), pages 657-681, October.
    23. Ravi Bansal & Hao Zhou, 2002. "Term Structure of Interest Rates with Regime Shifts," Journal of Finance, American Finance Association, vol. 57(5), pages 1997-2043, October.
    24. Dong-Hyun Ahn & Robert F. Dittmar, 2002. "Quadratic Term Structure Models: Theory and Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 243-288, March.
    25. Dasgupta, Amil, 2007. "Coordination and delay in global games," Journal of Economic Theory, Elsevier, vol. 134(1), pages 195-225, May.
    26. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-155, January.
    27. Itay Goldstein & Ady Pauzner, 2005. "Demand–Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, June.
    28. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    29. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    30. Chernov, Mikhail & Ronald Gallant, A. & Ghysels, Eric & Tauchen, George, 2003. "Alternative models for stock price dynamics," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 225-257.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rainer Masera, 2014. "CRR/CRD IV: the trees and the forest," PSL Quarterly Review, Economia civile, vol. 67(271), pages 381-422.
    2. Olga Shurchkov, 2013. "Coordination and learning in dynamic global games: experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 16(3), pages 313-334, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Angeletos, G.-M. & Lian, C., 2016. "Incomplete Information in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1065-1240, Elsevier.
    2. Xuewen Liu, 2015. "Short-Selling Attacks and Creditor Runs," Management Science, INFORMS, vol. 61(4), pages 814-830, April.
    3. Neil Shephard & Torben Andersen, 2008. "Stochastic Volatility: Origins and Overview," Economics Papers 2008-W04, Economics Group, Nuffield College, University of Oxford.
    4. Assaf Razin & Itay Goldstein, 2012. "Review Of Theories of Financial Crises," 2012 Meeting Papers 214, Society for Economic Dynamics.
    5. repec:hum:wpaper:sfb649dp2009-011 is not listed on IDEAS
    6. Edmond, Chris, 2018. "Non-Laplacian beliefs in a global game with noisy signaling," Research in Economics, Elsevier, vol. 72(2), pages 297-312.
    7. Toni Ahnert & Ali Kakhbod, 2017. "Information Choice and Amplification of Financial Crises," The Review of Financial Studies, Society for Financial Studies, vol. 30(6), pages 2130-2178.
    8. George-Marios Angeletos & Chen Lian, 2016. "Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination," NBER Working Papers 22297, National Bureau of Economic Research, Inc.
    9. Tijmen R. Daniels & Henk Jager & Franc Klaassen, 2008. "Defending against Speculative Attacks," Tinbergen Institute Discussion Papers 08-090/2, Tinbergen Institute, revised 06 Apr 2009.
    10. Daniëls, Tijmen R. & Jager, Henk & Klaassen, Franc, 2011. "Currency crises with the threat of an interest rate defence," Journal of International Economics, Elsevier, vol. 85(1), pages 14-24, September.
    11. Masahiro Watanabe, 2003. "A Model of Stochastic Liquidity," Yale School of Management Working Papers ysm385, Yale School of Management.
    12. Kováč, Eugen & Steiner, Jakub, 2013. "Reversibility in dynamic coordination problems," Games and Economic Behavior, Elsevier, vol. 77(1), pages 298-320.
    13. Frankel, David M., 2017. "Efficient ex-ante stabilization of firms," Journal of Economic Theory, Elsevier, vol. 170(C), pages 112-144.
    14. Guimaraes, Bernardo & Morris, Stephen, 2007. "Risk and wealth in a model of self-fulfilling currency attacks," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2205-2230, November.
    15. Pavan, Alessandro & Vives, Xavier, 2015. "Information, Coordination, and Market Frictions: An Introduction," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 407-426.
    16. Junichi Fujimoto, 2014. "Speculative attacks with multiple targets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 89-132, September.
    17. Goldstein, Itay & Razin, Assaf, 2015. "Three Branches of Theories of Financial Crises," Foundations and Trends(R) in Finance, now publishers, vol. 10(2), pages 113-180, 30.
    18. Demosthenes Tambakis, 2009. "Feedback trading and intermittent market turbulence," Quantitative Finance, Taylor & Francis Journals, vol. 9(4), pages 477-489.
    19. Markus K. Brunnermeier & Lasse Heje Pedersen, 2005. "Predatory Trading," Journal of Finance, American Finance Association, vol. 60(4), pages 1825-1863, August.
    20. Zhiguo He & Wei Xiong, 2012. "Dynamic Debt Runs," The Review of Financial Studies, Society for Financial Studies, vol. 25(6), pages 1799-1843.
    21. Kathy Yuan & Emre Ozdenoren & Itay Goldstein, 2008. "Learning and Complementarities: Implications for Speculative Attacks," 2008 Meeting Papers 276, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ier:iecrev:v:52:y:2011:i:3:p:621-638. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley-Blackwell Digital Licensing or the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/deupaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.