Liquidity and the Threat of Fraudulent Assets

Yiting Li, Guillaume Rocheteau and Pierre-Olivier Weill

No 17500, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as collateral in the OTC market. Each endogenous, asset-specific, resalability constraint depends on the vulnerability of the asset to fraud, on the frequency of trade, and on the current and future prices of the asset. In equilibrium, the set of assets can be partitioned into three liquidity tiers, which differ in their resalability, their prices, their sensitivity to shocks, and their responses to policy interventions. The dependence of an asset's resalability on its price creates a pecuniary externality, which leads to the result that some policies commonly thought to improve liquidity can be welfare reducing.

JEL-codes: E41 E44 E5 E58 G1 G12 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-cis, nep-dge and nep-mac
Note: AP EFG ME
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Citations: View citations in EconPapers (4)

Published as Yiting Li & Guillaume Rocheteau & Pierre-Olivier Weill, 2012. "Liquidity and the Threat of Fraudulent Assets," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 000 - 000.

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Journal Article: Liquidity and the Threat of Fraudulent Assets (2012)
Working Paper: Liquidity and the threat of fraudulent assets (2011)
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