Leaning Against the Wind

67 Pages Posted: 21 Feb 2005

See all articles by Pierre-Olivier Weill

Pierre-Olivier Weill

University of California, Los Angeles; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2003

Abstract

During financial disruptions, marketmakers provide liquidity by absorbing external selling pressure. They buy when the pressure is large, accumulate inventories, and sell when the pressure alleviates. This paper studies optimal dynamic liquidity provision in a theoretical market setting with large and temporary selling pressure, and order-execution delays. I show that competitive marketmakers offer the socially optimal amount of liquidity, provided they have access to sufficient capital. If raising capital is costly, this suggests a policy role for lenient central-bank lending during financial disruptions.

Keywords: Marketmaking capital, marketmaker inventory, management, financial crisis

JEL Classification: G12, G19

Suggested Citation

Weill, Pierre-Olivier, Leaning Against the Wind (September 2003). Available at SSRN: https://ssrn.com/abstract=664262 or http://dx.doi.org/10.2139/ssrn.664262

Pierre-Olivier Weill (Contact Author)

University of California, Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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