Crashes and Recoveries in Illiquid Markets

@inproceedings{Lagos2007CrashesAR,
  title={Crashes and Recoveries in Illiquid Markets},
  author={Ricardo Lagos and Guillaume Rocheteau},
  year={2007}
}
We study the dynamics of liquidity provision by dealers during an asset market crash, described as a temporary negative shock to investors’aggregate asset demand. We consider a class of dynamic market settings where dealers can trade continuously with each other, while trading between dealers and investors is subject to delays and involves bargaining. We derive conditions on fundamentals, such as preferences, market structure and the characteristics of the market crash (e.g., severity… CONTINUE READING

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