Market run-ups, market freezes, inventories, and leverage

Philip Bond and Yaron Leitner

Journal of Financial Economics, 2015, vol. 115, issue 1, 155-167

Abstract: We study trade between an informed seller and an uninformed buyer who have existing inventories of assets similar to those being traded. We show that these inventories could induce the buyer to increase the price (a run-up) but could also make trade impossible (a freeze) and hamper information dissemination. Competition can amplify the run-up by inducing buyers to purchase assets at a loss to prevent competitors from purchasing at lower prices and releasing bad news about inventories. In a dynamic extension, we show that a market freeze could be preceded by high prices. Finally, we discuss empirical and policy implications.

Keywords: Adverse selection; Financial crisis; Capital constraints; Marking to market; Inventories (search for similar items in EconPapers)
JEL-codes: D82 G01 G21 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:115:y:2015:i:1:p:155-167

DOI: 10.1016/j.jfineco.2014.08.008

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