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On the impact of fundamentals, liquidity, and coordination on market stability

Danielsson, Jon and Peñaranda, Francisco (2011) On the impact of fundamentals, liquidity, and coordination on market stability. International Economic Review, 52 (3). pp. 621-638. ISSN 0020-6598

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Abstract

We develop a coordination game to model interactions between fundamentals and liquidity during unstable periods in financial markets. We then propose a flexible econometric framework for estimation of the model and analysis of its quantitative implications. The specific empirical application is carry trades in the yen-dollar market, including the turmoil of 1998. We find a generally very deep market, with low information disparities among agents. We observe occasional episodes of market fragility or turmoil withup by the escalator, down by the elevatorpatterns in prices. The key role of strategic behavior in the econometric model is also confirmed.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/%28...
Additional Information: © 2011 Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling
D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets
Sets: Departments > Finance
Collections > Economists Online
Research centres and groups > Financial Markets Group (FMG)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 17 Oct 2011 10:38
URL: http://eprints.lse.ac.uk/38923/

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