publication . Article . Other literature type . 2014

Illiquidity Contagion and Liquidity Crashes

Cespa, Giovanni; Foucault, Thierry;
Open Access
  • Published: 01 Jun 2014 Journal: SSRN Electronic Journal (eissn: 1556-5068, Copyright policy)
  • Publisher: Elsevier BV
Abstract
International audience; Liquidity providers often learn information about an asset from prices of other assets. We show that this generates a self-reinforcing positive relationship between price informativeness and liquidity. This relationship causes liquidity spillovers and is a source of fragility: a small drop in the liquidity of one asset can, through a feedback loop, result in a very large drop in market liquidity and price informativeness (a liquidity crash). This feedback loop provides a new explanation for comovements in liquidity and liquidity dry-ups. It also generates multiple equilibria.
doi: 10.2139/ssrn.1804351 , 10.1093/rfs/hhu016
Subjects
free text keywords: Liquidity spillovers, Contagion, Liquidity Crashes, Multiple equilibria, Rational expectations, JEL : G - Financial Economics/G.G1 - General Financial Markets/G.G1.G10 - General, JEL : G - Financial Economics/G.G1 - General Financial Markets/G.G1.G12 - Asset Pricing • Trading Volume • Bond Interest Rates, JEL : G - Financial Economics/G.G1 - General Financial Markets/G.G1.G14 - Information and Market Efficiency • Event Studies • Insider Trading, [ SHS.GESTION.FIN ] Humanities and Social Sciences/Business administration/domain_shs.gestion.fin, JEL: G - Financial Economics/G.G1 - General Financial Markets/G.G1.G10 - General, JEL: G - Financial Economics/G.G1 - General Financial Markets/G.G1.G12 - Asset Pricing • Trading Volume • Bond Interest Rates, JEL: G - Financial Economics/G.G1 - General Financial Markets/G.G1.G14 - Information and Market Efficiency • Event Studies • Insider Trading, [SHS.GESTION.FIN]Humanities and Social Sciences/Business administration/domain_shs.gestion.fin, Economics and Econometrics, Accounting, Finance
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