Endogenous liquidity and contagion

Rohit Rahi () and Jean-Pierre Zigrand

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

Abstract: Market liquidity is typically characterized by a number of ad hoc metrics, such as depth, volume, bid-ask spreads etc. No general coherent denition seems to exist, and few attempts have been made to justify the existing metrics on welfare grounds. In this paper we propose a welfare-based denition of liquidity and characterize its relationship to the usual proxies. Our analysis rests on a general equilibrium model with multiple assets and restricted investor participation. Strategic intermediaries pursue prot opportunities by providing intermediation services (i.e. "liquidity") in exchange for an endogenous fee. Our model is well-suited to study the contagion-like eects of liquidity shocks.

Keywords: Liquidity; intermediation; arbitrage; segmented markets; contagion (search for similar items in EconPapers)
JEL-codes: D52 D53 G10 G20 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2009-08-01
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http://eprints.lse.ac.uk/29300/ Open access version. (application/pdf)

Related works:
Working Paper: Endogenous Liquidity and Contagion (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:29300

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