Experimental evidence on the ‘insidious’ illiquidity risk

Damien Besancenot and Radu Vranceanu

Research in Economics, 2014, vol. 68, issue 4, 315-323

Abstract: This paper introduces an experiment aiming to investigate the contribution of illiquidity risk to the total risk of a collective investment project. If implemented, the project succeeds with a known probability. Yet the project fails if the quota of investors is not reached in the first place. Hence strategic uncertainty compounds its effect with the “intrinsic risk” of the project. Results confirm the insidious nature of illiquidity: as long as a first collective default does not occur, investors accept high intrinsic risk projects. After a first default, they become extremely prudent and come back to market only gradually. After several defaults, private agents manage to coordinate on a relatively low intrinsic risk above which they refuse to participate in the project. Macroeconomic policy implications follow.

Keywords: Coordination game; Illiquidity risk; Threshold strategy; Overconfidence (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Experimental Evidence on the ‘Insidious’ Illiquidity Risk (2011)
Working Paper: Experimental Evidence on the 'Insidious' Illiquidity Risk (2011)
Working Paper: Experimental evidence on the "insidious" illiquidity risk (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:68:y:2014:i:4:p:315-323

DOI: 10.1016/j.rie.2013.10.006

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