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A Model of Financial Market Liquidity Based on Intermediary Capital

Denis Gromb and Dimitri Vayanos

Journal of the European Economic Association, 2010, vol. 8, issue 2-3, 456-466

Abstract: We present a model of financial market liquidity provided by financially constrained intermediaries. We show that market liquidity increases with the level of intermediary capital. We also characterize conditions under which intermediaries play a stabilizing or destabilizing role in markets. Finally, we sketch a number of areas, including welfare and public policy, on which the model can shed light. (JEL: G01, G11, G12, G15, G18) (c) 2010 by the European Economic Association.

JEL-codes: G01 G11 G12 G15 G18 (search for similar items in EconPapers)
Date: 2010
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