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Liquidity Black Hole and Optimal Behavioral

Giovanni Tira, Tommaso Gabrieli () and Gianluca Marcato ()

ERES from European Real Estate Society (ERES)

Abstract: In turmoil periods, market liquidity can experience sudden dry ups connected with a significant price movements. This unexpected changes in liquidity patterns, often driven by irrational investorsí behaviour,and it is normally defined as Liquidity Black Hole (LBH). So far relevant research in this area explored macro-market level rather than explaining micro-agent decisions. In this study we show - both theoretically and empirically - that the LBH effect at market micro-level is originated by agentsí decisions made at a mutual fund level. We present a model on the behaviour of investors as a function of expected market risks and returns. The causes of a LBH are analyzed and the model is also tested under real case scenario, i.e. UK Real Estate Mutual Fund industry. Price creation is modeled both endogenously and exogenously, and it shows that the relationship between fund flows and expected liquidity risk follows an exponential function. Finally, we demonstrate that areas of absolute LBH exist and cannot be hedged. In those areas neither the available îcash-like cushionî nor the managerial skills of the market maker can avoid the îeconomic failureî of a fund.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2011-01-01
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