Crises and liquidity in over-the-counter markets

Ricardo Lagos, Guillaume Rocheteau and Pierre-Olivier Weill

Journal of Economic Theory, 2011, vol. 146, issue 6, 2169-2205

Abstract: We study the efficiency of liquidity provision by dealers and the desirability of policy intervention in over-the-counter (OTC) markets during crises. We emphasizes two OTC frictions: finding counterparties takes time, and trade is bilateral and involves bargaining. We model a crisis as a shock that reduces investorsʼ asset demands, lasting until a random recovery time. In this context, dealers can provide liquidity to investors by accumulating asset inventories. When OTC frictions are severe, even well capitalized dealers may not find it privately optimal to accumulate inventories, and direct purchase by the government can improve welfare.

Keywords: Liquidity; Asset inventories; Execution delays; Search; Bargaining (search for similar items in EconPapers)
JEL-codes: C78 D83 E44 G1 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (105)

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Related works:
Working Paper: Crises and Liquidity in Over-the-counter Markets (2010)
Working Paper: Crises and Liquidity in Over-the-Counter Markets (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:146:y:2011:i:6:p:2169-2205

DOI: 10.1016/j.jet.2011.10.001

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