When Do Trade Frictions Increase Liquidity?

Gara Afonso

No 20111219, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Economists tend to assume that frictions that limit trading in financial markets reduce liquidity and lower investor welfare. In this blog I discuss a recent staff study of mine that challenges that conventional wisdom. I explain how introducing trading frictions—such as circuit breakers—that slow or halt trading in an over-the-counter market experiencing a fire sale might, paradoxically, lead to higher liquidity and investor welfare.

Keywords: asset pricing; search; congestion; trading halts; Liquidity (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2011-12-19
New Economics Papers: this item is included in nep-mst
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