Safe but fragile: Information acquisition, liquidity support and redemption runs

Philipp J. Koenig and David Pothier

Journal of Financial Intermediation, 2022, vol. 52, issue C

Abstract: This paper proposes a theory of redemption runs based on strategic information acquisition by fund managers. We argue that liquidity lines provided by third parties can be a source of financial fragility, as they incentivize fund managers to acquire private information about the value of their assets. This strategic information acquisition can lead to inefficient market liquidity dry-ups caused by self-fulfilling fears of adverse selection. By lowering asset prices, information acquisition also reduces the value of funds’ assets-under-management and may spur inefficient redemption runs by investors. Two different regimes can arise: one in which funds’ information acquisition incentives are unaffected by the volume of redemptions, and another where market and funding liquidity risk mutually reinforce each other.

Keywords: Information Acquisition; Fund Runs; Global Games (search for similar items in EconPapers)
JEL-codes: D82 G01 G20 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:52:y:2022:i:c:s1042957320300528

DOI: 10.1016/j.jfi.2020.100898

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