On the Impact of Fundamentals, Liquidity and Coordination on Market Stability

Francisco Penaranda () and Jon Danielsson ()

FMG Discussion Papers from Financial Markets Group

Abstract: Complex interactions between fundamentals and liquidity during unstable periods in financial markets are succinctly modeled with coordination games. We propose a flexible framework to estimate such a model and use the efficient method of moments as estimation procedure. We illustrate the model by using exchange rates from the yen–dollar carry trade induced uncertainty in 1998, interest rate spreads and global market volatility. The model fits the data well, with evidence of low information disparities, the market is generally very deep, where global volatility is more important than fundamental uncertainty in the determination of liquidity. There is clear evidence of asymmetry between the buy and sell sides of the market.

Date: 2007-01

Downloads: (external link)
http://fmg.lse.ac.uk/pdfs/dp586.pdf (application/pdf)
Financial Markets Group Working Papers are free to download for academics and students, and for our subscribers and sponsors. If you fall into one of these categories but have trouble downloading our papers, or if you do not fall into one of these categories but would like to pay for a copy, please contact us at fmg@lse.ac.uk

Related works:
Working Paper: On the Impact of Fundamentals, Liquidity and Coordination on Market Stability (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:fmg:fmgdps:dp586

Access Statistics for this paper

More papers in FMG Discussion Papers from Financial Markets Group
Series data maintained by The FMG Administration ().