A Tale of Fire-Sales and Liquidity Hoarding

Aleksander Berentsen and Benjamin Müller

No 2017-16, Working Papers from Swiss National Bank

Abstract: We extend the analysis of the theoretical interbank market model of Gale and Yorulmazer (2013) by introducing randomized trading (lotteries). In contrast to Gale and Yorulmazer, we find that fire-sale asset prices are efficient and that no liquidity hoarding occurs in equilibrium with lotteries. While Gale and Yorulmazer find that the market provides insufficient liquidity, we find that it provides too much liquidity when introducing lotteries. We also show how to decentralize the efficient lottery mechanism.

Keywords: Fire-sales; lotteries; liquidity hoarding; interbank markets; indivisibility (search for similar items in EconPapers)
JEL-codes: G12 G21 G33 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2017
New Economics Papers: this item is included in nep-ban and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2017-16

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