Illiquidity contagion and liquidity crashes

• Autores: Giovanni Cespa, Thierry Foucault
• Localización: Review of Financial Studies, ISSN-e 1465-7368, Vol. 27, Nº. 6, 2014, págs. 1615-1660
• Idioma: inglés
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• Resumen

  • Liquidity providers often learn information about an asset from prices of other assets. We show that this generates a self-reinforcing positive relationship between price informativeness and liquidity. This relationship causes liquidity spillovers and is a source of fragility: a small drop in the liquidity of one asset can, through a feedback loop, result in a very large drop in market liquidity and price informativeness (a liquidity crash). This feedback loop provides a new explanation for comovements in liquidity and liquidity dry-ups. It also generates multiple equilibria.