Arbeitspapier
Information acquisition and liquidity dry-ups
We analyze a novel feedback mechanism between market and funding liquidity that causes self-fulfilling liquidity dry-ups. Financial firms facing funding withdrawals have an incentive to acquire information about their assets. Those with good assets gain by resorting to outside liquidity sources and withhold assets from secondary markets. This leads to adverse selectrion and lowers market prices. If prices fall by enough, funding withdrawals are amplified and market and funding illiquidity become mutually reinforcing. We compare different policy measures that can mitigate the risk of inefficient liquidity dry-ups. While outright debt purchases can implement the efficient allocation, liquidity injections may backfire and exacerbate adverse selection.
- Language
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Englisch
- Bibliographic citation
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Series: SFB 649 Discussion Paper ; No. 2016-045
- Classification
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Wirtschaft
Asymmetric and Private Information; Mechanism Design
Financial Crises
Asset Pricing; Trading Volume; Bond Interest Rates
- Subject
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Information Acquisition
Market Liquidity
Financial Crises
- Event
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Geistige Schöpfung
- (who)
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Koenig, Philipp
Pothier, David
- Event
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Veröffentlichung
- (who)
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Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
- (where)
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Berlin
- (when)
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2016
- Handle
- Last update
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10.03.2025, 11:44 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Koenig, Philipp
- Pothier, David
- Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
Time of origin
- 2016