Gromb, Denis and Vayanos, Dimitri (2010) A model of financial market liquidity based on intermediary capital. Journal of the European Economic Association, 8 (2-3). pp. 456-466. ISSN 1542-4774
We present a model of financial market liquidity provided by financially constrained intermediaries. We show that market liquidity increases with the level of intermediary capital.We also characterize conditions under which intermediaries play a stabilizing or destabilizing role in markets. Finally, we sketch a number of areas, including welfare and public policy, on which the model can shed light.
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