Crashes and Recoveries in Illiquid Markets

Ricardo Lagos, Guillaume Rocheteau and Pierre-Olivier Weill

No 14119, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the dynamics of liquidity provision by dealers during an asset market crash, described as a temporary negative shock to investors aggregate asset demand. We consider a class of dynamic market settings where dealers can trade continuously with each other, while trading between dealers and investors is subject to delays and involves bargaining. We derive conditions on fundamentals, such as preferences, market structure and the characteristics of the market crash (e.g., severity, persistence) under which dealers provide liquidity to investors following the crash. We also characterize the conditions under which dealers incentives to provide liquidity are consistent with market efficiency.

JEL-codes: C78 D83 E44 G1 (search for similar items in EconPapers)
Date: 2008-06
New Economics Papers: this item is included in nep-cta, nep-dge, nep-mac and nep-mst
Note: AP
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Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Crashes and recoveries in illiquid markets (2007)
Working Paper: Crashes and Recoveries in Illiquid Markets (2007)
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