Market Illiquidity, Credit Freezes and Endogenous Funding Constraints

@inproceedings{Bachmann2018MarketIC,
  title={Market Illiquidity, Credit Freezes and Endogenous Funding Constraints},
  author={Manuel Bachmann},
  year={2018}
}
In this paper I propose a two-step theoretical extension of the baseline model by Diamond and Rajan (2011) and examine the amplification mechanisms when collateralized funding shocks are endogenously affected by liquidity shocks. Based on high returns on illiquid assets that are potentially available conditional on future fire sales, liquid banks increase their cash holdings by limiting term lending - a speculative motive of liquidity hoarding directly aggravated by a cash reduction due to… CONTINUE READING

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