References (36)


Citations (9)



Illiquidity Contagion and Liquidity Crashes

Giovanni Cespa

Cass Business School; Centre for Economic Policy Research (CEPR)

Thierry Foucault

HEC Paris - Finance Department

January 2014

Liquidity providers often learn information about an asset from prices of other assets. We show that this generates a self-reinforcing positive relationship between price informativeness and liquidity. This relationship causes liquidity spillovers and is a source of fragility: a small drop in the liquidity of one asset can, through a feedback loop, result in a very large drop in market liquidity and price informativeness (a liquidity crash). This feedback loop provides a new explanation for comovements in liquidity and liquidity dry-ups. It also generates multiple equilibria.

Number of Pages in PDF File: 72

Keywords: Liquidity spillovers, Contagion, Liquidity Crashes, Multiple equilibria, Rational expectations

JEL Classification: G10, G12, G14

Open PDF in Browser Download This Paper

Date posted: April 8, 2011 ; Last revised: February 19, 2014

Suggested Citation

Cespa, Giovanni and Foucault, Thierry, Illiquidity Contagion and Liquidity Crashes (January 2014). Available at SSRN: http://ssrn.com/abstract=1804351 or http://dx.doi.org/10.2139/ssrn.1804351

Contact Information

Giovanni Cespa
Cass Business School ( email )
106, Bunhill Row
London, EC1Y 8TZ
Great Britain
+44(0)2040708704 (Phone)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Thierry Foucault (Contact Author)
HEC Paris - Finance Department ( email )
1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
(33)139679569 (Phone)
(33)139677085 (Fax)
HOME PAGE: http://thierryfoucault.com/

Feedback to SSRN

Paper statistics
Abstract Views: 2,695
Downloads: 560
Download Rank: 31,051
References:  36
Citations:  9
People who downloaded this paper also downloaded:
1. High Frequency Trading and Price Discovery
By Jonathan Brogaard, Terrence Hendershott, ...

© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.406 seconds