DefaultRisk.com the web's biggest credit risk modeling resource.

Credit Jobs

Home Glossary Links FAQ / About Site Guide Search
pp_liqty_23

Up

Submit Your Paper

In Rememberance: World Trade Center (WTC)

Export citation to:
- HTML
- Text (plain)
- BibTeX
- RIS
- ReDIF

Liquidity Black Holes

by Stephen Morris of Yale University, and
Hyun Song Shin of the London School of Economics

March 2004

Abstract: Traders with short horizons and privately known loss limits interact in a market for a risky asset. Risk-averse, long horizon traders generate a downward sloping residual demand curve that faces the short-horizon traders. When the price falls close to the loss limits of the short horizon traders, selling of the risky asset by any trader increases the incentives for others to sell. Sales become mutually reinforcing among the short term traders, and payoffs analogous to a bank run are generated. A "liquidity black hole" is the analogue of the run outcome in a bank run model. Short horizon traders sell because others sell. Using global game techniques, we solve for the unique trigger point at which the liquidity black hole comes into existence. Empirical implications include the sharp V-shaped pattern in prices around the time of the liquidity black hole.

Published in: Review of Finance, Vol. 8, No. 1, (2004), pp, 1-18.

Books Referenced in this paper:  (what is this?)

Download paper (127K PDF) 18 pages