On the impact of fundamentals, liquidity and coordination on market stability

Jon Danielsson and Francisco Penaranda

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Complex interactions between fundamentals and liquidity during unstable periods in financial markets are succinctly modeled with coordination games. We propose a flexible framework to estimate such a model and use the efficient method of moments as estimation procedure. We illustrate the model by using exchange rates from the yen–dollar carry trade induced uncertainty in 1998, interest rate spreads and global market volatility. The model fits the data well, with evidence of low information disparities, the market is generally very deep, where global volatility is more important than fundamental uncertainty in the determination of liquidity. There is clear evidence of asymmetry between the buy and sell sides of the market.

JEL-codes: E44 G10 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2007-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://eprints.lse.ac.uk/24480/ Open access version. (application/pdf)

Related works:
Journal Article: ON THE IMPACT OF FUNDAMENTALS, LIQUIDITY, AND COORDINATION ON MARKET STABILITY (2011)
Working Paper: On the impact of fundamentals, liquidity and coordination on market stability (2010)
Working Paper: On the Impact of Fundamentals, Liquidity and Coordination on Market Stability (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24480

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