Abstract

http://ssrn.com/abstract=307719
 
 

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Liquidity and Financial Market Runs


Antonio E. Bernardo


University of California, Los Angeles (UCLA) - Finance Area

Ivo Welch


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

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

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Date posted: July 15, 2003  

Suggested Citation

Bernardo, Antonio E. and Welch, Ivo, Liquidity and Financial Market Runs (May 27, 2003). Yale ICF Working Paper No. 02-11; AFA 2003 Washington, DC Meetings. Available at SSRN: http://ssrn.com/abstract=307719

Contact Information

Antonio E. Bernardo
University of California, Los Angeles (UCLA) - Finance Area ( email )
Los Angeles, CA 90095-1481
United States
310-825-2198 (Phone)
310-206-5455 (Fax)
Ivo Welch (Contact Author)
University of California, Los Angeles (UCLA) ( email )
405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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