EconPapers    
Economics at your fingertips  
 

Adverse Selection and Liquidity Distortion

Briana Chang

Review of Economic Studies, 2018, vol. 85, issue 1, 275-306

Abstract: This article develops a tractable model with two-dimensional asymmetric information in asset markets: sellers are privately informed about their asset quality and distress positions. Illiquidity arises endogenously and manifests itself through two distinct market outcomes. The first outcome features limited market participation, resulting in a dry-up in trading volume. The second outcome involves a large volume at a depressed price. Only in the latter outcome do distressed sellers engage in fire sales, quickly unwinding their positions at a steep price discount. The article further establishes that this equilibrium can arise only when buyers expect that sellers with a higher need for immediacy will on average have higher-quality assets. Hence, both the information structure and the distribution of sellers’ distress are crucial for the existence of fire sales.

Keywords: Liquidity; Fire sales; Market dry-up; Decentralized trading (search for similar items in EconPapers)
JEL-codes: D82 G1 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdx015 (application/pdf)
Access to full text is restricted to subscribers.

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:oup:restud:v:85:y:2018:i:1:p:275-306.

Access Statistics for this article

Review of Economic Studies is currently edited by Andrea Prat, Bruno Biais, Kjetil Storesletten and Enrique Sentana

More articles in Review of Economic Studies from Oxford University Press
Bibliographic data for series maintained by Oxford University Press ().

 
Page updated 2018-08-04
Handle: RePEc:oup:restud:v:85:y:2018:i:1:p:275-306.