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Liquidity and Financial Market RunsAntonio E. BernardoUniversity of California, Los Angeles (UCLA) - Finance Area Ivo WelchUniversity of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER) May 27, 2003 Yale ICF Working Paper No. 02-11; AFA 2003 Washington, DC Meetings Abstract: We model a run on a financial market, in which each risk-neutral investor fears having to liquidate shares after a run, but before prices can recover back to fundamental values. To avoid having to possibly liquidate shares at the marginal post-run price - in which case the risk-averse market-making sector will already hold a lot of share inventory and thus be more reluctant to absorb additional shares - each investor may prefer selling today at the average in-run price, thereby causing the run itself. Liquidity runs and crises are not caused by liquidity shocks per se, but by the fear of future liquidity shocks.
Number of Pages in PDF File: 35 JEL Classification: G1, G2, G21, E44, N2 working papers seriesDate posted: July 15, 2003Suggested CitationContact Information
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