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Endogenous liquidity and contagion

Rahi, Rohit and Zigrand, Jean-Pierre (2009) Endogenous liquidity and contagion. Discussion paper, 637. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

Market liquidity is typically characterized by a number of ad hoc metrics, such as depth, volume, bid-ask spreads etc. No general coherent denition seems to exist, and few attempts have been made to justify the existing metrics on welfare grounds. In this paper we propose a welfare-based denition of liquidity and characterize its relationship to the usual proxies. Our analysis rests on a general equilibrium model with multiple assets and restricted investor participation. Strategic intermediaries pursue prot opportunities by providing intermediation services (i.e. "liquidity") in exchange for an endogenous fee. Our model is well-suited to study the contagion-like eects of liquidity shocks.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2009 The authors
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets
D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets
G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
G - Financial Economics > G1 - General Financial Markets > G10 - General
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 637
Date Deposited: 09 Sep 2010 13:27
URL: http://eprints.lse.ac.uk/29300/

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