Experimental Evidence on the 'Insidious' Illiquidity Risk

ESSEC Working Paper 1107

25 Pages Posted: 20 Aug 2013

See all articles by Damien Besancenot

Damien Besancenot

Université Paris II Pantheon-Assas

Radu Vranceanu

ESSEC Business School; University of Cergy-Pontoise - THEMA

Date Written: February 17, 2013

Abstract

This paper brings experimental evidence on investors' behavior subject to an "illiquidity" constraint, where the success of a risky project depends on the participation of a minimum number of investors. The experiment is set up as a frameless coordination game that replicates the investment context. Results confirm the insidious nature of the illiquidity risk: as long as a first illiquidity default does not occur, investors do not seem able to fully internalize it. After several defaults, agents manage to coordinate on a default probability above which they refuse to participate to the project. This default probability is lower than the default probability of the first illiquidity default.

Keywords: Coordination game, Illiquidity risk, Threshold strategy, Experimental economics

JEL Classification: D81, C92, C72, G20

Suggested Citation

Besancenot, Damien and Vranceanu, Radu, Experimental Evidence on the 'Insidious' Illiquidity Risk (February 17, 2013). ESSEC Working Paper 1107, Available at SSRN: https://ssrn.com/abstract=2312310 or http://dx.doi.org/10.2139/ssrn.2312310

Damien Besancenot (Contact Author)

Université Paris II Pantheon-Assas ( email )

35, ave. MacMahon
75017 Paris, 75006
France

Radu Vranceanu

ESSEC Business School ( email )

3, Av. Bernard Hirsch
PB 50105
Cergy-Pontoise, 95021
France

HOME PAGE: http://www.essec.fr

University of Cergy-Pontoise - THEMA ( email )

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France

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