Leaning against the wind

Pierre-Olivier Weill

No 382, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: During financial disruptions, marketmakers provide liquidity by absorbing external selling pressure. They buy when the pressure is large, accumulate inventories, and sell when the pressure alleviates. This paper studies optimal dynamic liquidity provision in a theoretical market setting with large and temporary selling pressure, and order-execution delays. I show that competitive marketmakers offer the socially optimal amount of liquidity, provided they have access to enough capital. If raising capital is costly, this suggests a policy role for lenient central-bank lending during financial disruptions.

Keywords: search; financial crisis (search for similar items in EconPapers)
JEL-codes: E50 G20 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-dge and nep-ifn
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Citations: View citations in EconPapers (16)

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Journal Article: Leaning Against the Wind (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed004:382

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