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A theory of strategic intermediation and endogenous liquidity

Rahi, Rohit and Zigrand, Jean-Pierre (2007) A theory of strategic intermediation and endogenous liquidity. Rohit Rahi and Jean-Pierre Zigrand, London, UK. (Unpublished)

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Abstract

Market liquidity is typically characterized by a number of ad hoc metrics, such as depth (or market impact), volume, intermediation costs (such as breadth) 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 with the usual proxies. The model on which the welfare analysis rests is an equilibrium model with multiple assets and restricted investor participation. Strategic intermediaries pursue prot opportunities by providing intermedia- tion services (i.e. \liquidity") in exchange for an endogenous fee. Our model is well suited to study the contagion-like eects of liquidity shocks. We also consider the case in which intermediaries can optimally design securities.

Item Type: Monograph (Discussion Paper)
Official URL: http://vishnu.lse.ac.uk/Rohit_Rahi/Homepage.html
Additional Information: © 2007 Rohit Rahi and Jean-Pierre Zigrand
Library of Congress subject classification: H Social Sciences > HG Finance
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: Departments > Accounting and Finance
Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Departments > Economics
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 02 Mar 2009 14:46
URL: http://eprints.lse.ac.uk/4764/

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