Market Liquidity and Creditor Runs: Feedback, Amplification, and Multiplicity

22 Pages Posted: 18 Jul 2018 Last revised: 8 Aug 2018

See all articles by Xuewen Liu

Xuewen Liu

University of Hong Kong (HKU) - Finance Area, Faculty of Business and Economics

Date Written: August 2018

Abstract

In the global games framework, this paper studies bank runs in a financial system, in which there are many banks and they share a common asset market. Our model 1) endogenizes market liquidity, 2) demonstrates two-way feedback between market liquidity and creditor runs, and 3) shows the possibility of multiple equilibria in the system: even when the precision of creditors' private signals approaches infinity, multiple equilibria (i.e., a self-fulfilling systemic crisis) can still emerge. Our model helps explain amplification and multiplicity in financial crises.

Keywords: Global games, bank runs, strategic complementarities, equilibrium multiplicity, systemic crises

JEL Classification: G01; G21; D82; D53

Suggested Citation

Liu, Xuewen, Market Liquidity and Creditor Runs: Feedback, Amplification, and Multiplicity (August 2018). Available at SSRN: https://ssrn.com/abstract=3208002 or http://dx.doi.org/10.2139/ssrn.3208002

Xuewen Liu (Contact Author)

University of Hong Kong (HKU) - Finance Area, Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

HOME PAGE: http://web.hku.hk/~xuewenl/

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