Market Freezes

Chao Gu, Guido Menzio, Randall Wright and Yu Zhu

No 29210, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: During the financial crisis apparently centralized markets continued to function while trade in OTC markets froze. We use search-and-bargaining theory to ascertain conditions that allow trade to temporarily freeze in decentralized markets, focusing on the roles of liquidity and self-fulfilling prophecies. We show standard models can have recurrent, belief-driven hot and cold spells, but not freezes and thaws. A simple specification that has freezes assumes negative returns. A more realistic one incorporates information frictions (costly asset-quality verification). Another uses different frictions to get credit freezes. We also discuss policy implications, and go into detail on the nature of OTC markets.

JEL-codes: D53 D83 E30 E44 E52 G14 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-isf, nep-mac and nep-mst
Note: EFG ME
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Journal Article: Market Freezes (2024)
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