Market opacity and fragility: Why liquidity evaporates when it is most needed

Giovanni Cespa and Xavier Vives

No 11732, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Lack of market transparency can make liquidity demand upward sloping, inducing strategic complementarity and multiple equilibria, by impairing the liquidity provision of non-standard liquidity suppliers. Then an initial dearth of liquidity may degenerate into a liquidity rout (as in a “flash crash†) and traders faced with the largest cost of trading are those trading more intensely at equilibrium. An increase in order flow transparency and/or in the mass of dealers who are in the market at all times has a positive impact on total welfare.

Keywords: Liquidity; fragility (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2016-12
New Economics Papers: this item is included in nep-mst
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Journal Article: Market Opacity and Fragility: Why Liquidity Evaporates When It Is Most Needed (2026)
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