Episodic Liquidity Crises: Cooperative and Predatory Trading

Bruce Ian Carlin, Miguel Sousa Lobo and S Viswanathan ()

Journal of Finance, 2007, vol. 62, issue 5, 2235-2274

Abstract: We describe how episodic illiquidity arises from a breakdown in cooperation between market participants. We first solve a one‐period trading game in continuous‐time, using an asset pricing equation that accounts for the price impact of trading. Then, in a multi‐period framework, we describe an equilibrium in which traders cooperate most of the time through repeated interaction, providing apparent liquidity to one another. Cooperation breaks down when the stakes are high, leading to predatory trading and episodic illiquidity. Equilibrium strategies that involve cooperation across markets lead to less frequent episodic illiquidity, but cause contagion when cooperation breaks down.

Date: 2007
References: Add references at CitEc
Citations: View citations in EconPapers (124)

Downloads: (external link)
https://doi.org/10.1111/j.1540-6261.2007.01274.x

Related works:
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: https://EconPapers.repec.org/RePEc:bla:jfinan:v:62:y:2007:i:5:p:2235-2274

Ordering information: This journal article can be ordered from
http://www.afajof.org/membership/join.asp

Access Statistics for this article

More articles in Journal of Finance from American Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().