Liquidity and Financial Market Runs
Antonio E. Bernardo
University of California, Los Angeles (UCLA) - Finance Area
University 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
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, N2working papers series
Date posted: July 15, 2003
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.297 seconds