Do institutions behave rationally in distressed markets?

Hoon Cho, Doojin Ryu and Sangwook Sung

No 2017-103, Economics Discussion Papers from Kiel Institute for the World Economy

Abstract: The authors theoretically analyze the efficiency of liquidity flows in stabilizing distressed markets. Their analysis focuses on the incentives for financial institutions; specifically, they focus on arbitrage profit as an incentive and liquidity risk as a disincentive. The authors show that even with a major negative market shock, a financial institution can increase its market investment if it has sufficient funding liquidity. In addition, their model reveals a positive relationship between funding liquidity and liquidity flows. Thus, a distressed market might stabilize more quickly when financial institutions, acting as liquidity providers, have sufficient funding to bear the market's liquidity risk.

Keywords: market efficiency; arbitrage profit; liquidity risk; flight to quality; distressed market (search for similar items in EconPapers)
JEL-codes: G14 G18 G21 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.economics-ejournal.org/economics/discussionpapers/2017-103
https://www.econstor.eu/bitstream/10419/171378/1/1005598525.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:2017103

Access Statistics for this paper

More papers in Economics Discussion Papers from Kiel Institute for the World Economy Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().