Episodic Liquidity Crises: Cooperative and Predatory Trading
We describe how episodic illiquidity arises from a breakdown in cooperation between market participants. We first solve a one-period trading game in continuous-time, using an asset pricing equation that accounts for the price impact of trading. Then, in a multi-period framework, we describe an equilibrium in which traders cooperate most of the time through repeated interaction, providing apparent liquidity to one another. Cooperation breaks down when the stakes are high, leading to predatory trading and episodic illiquidity. Equilibrium strategies that involve cooperation across markets lead to less frequent episodic illiquidity, but cause contagion when cooperation breaks down. Copyright 2007 by The American Finance Association.
Year of publication: |
2007
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Authors: | CARLIN, BRUCE IAN ; LOBO, MIGUEL SOUSA ; VISWANATHAN, S. |
Published in: |
Journal of Finance. - American Finance Association - AFA, ISSN 1540-6261. - Vol. 62.2007, 5, p. 2235-2274
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Publisher: |
American Finance Association - AFA |
Saved in:
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