On the impact of fundamentals, liquidity and coordination on market stability

Francisco Peñaranda and Jon Danielsson

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We develop a coordination game to model interactions between fundamentals and liquidity during unstable periods in financial markets. We then propose a flexible econometric framework for estimation of the model and analysis of its quantitative implications. The specific empirical application is carry trades in the yen–dollar market, including the turmoil of 1998. We find a generally very deep market, with low information disparities amongst agents. We observe occasionally episodes of market fragility, or turmoil with up by the escalator, down by the elevator patterns in prices. The key role of strategic behavior in the econometric model is also confirmed.

Keywords: global games; efficient method of moments; carry trades; tail risk; strategic behavior; financial crises (search for similar items in EconPapers)
JEL-codes: C13 C15 C22 C51 F31 G12 G15 (search for similar items in EconPapers)
Date: 2007-01, Revised 2010-03
New Economics Papers: this item is included in nep-ifn and nep-mst
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Related works:
Journal Article: ON THE IMPACT OF FUNDAMENTALS, LIQUIDITY, AND COORDINATION ON MARKET STABILITY (2011)
Working Paper: On the impact of fundamentals, liquidity and coordination on market stability (2007)
Working Paper: On the Impact of Fundamentals, Liquidity and Coordination on Market Stability (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1003

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