IDEAS home Printed from https://ideas.repec.org/a/eee/reecon/v68y2014i4p315-323.html
   My bibliography  Save this article

Experimental evidence on the ‘insidious’ illiquidity risk

Author

Listed:
  • Besancenot, Damien
  • Vranceanu, Radu

Abstract

This paper introduces an experiment aiming to investigate the contribution of illiquidity risk to the total risk of a collective investment project. If implemented, the project succeeds with a known probability. Yet the project fails if the quota of investors is not reached in the first place. Hence strategic uncertainty compounds its effect with the “intrinsic risk” of the project. Results confirm the insidious nature of illiquidity: as long as a first collective default does not occur, investors accept high intrinsic risk projects. After a first default, they become extremely prudent and come back to market only gradually. After several defaults, private agents manage to coordinate on a relatively low intrinsic risk above which they refuse to participate in the project. Macroeconomic policy implications follow.

Suggested Citation

  • Besancenot, Damien & Vranceanu, Radu, 2014. "Experimental evidence on the ‘insidious’ illiquidity risk," Research in Economics, Elsevier, vol. 68(4), pages 315-323.
    • Handle: RePEc:eee:reecon:v:68:y:2014:i:4:p:315-323
    DOI: 10.1016/j.rie.2013.10.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1090944313000525
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.rie.2013.10.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
    2. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
    3. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
    4. Giovanna Devetag & Andreas Ortmann, 2007. "When and why? A critical survey on coordination failure in the laboratory," Experimental Economics, Springer;Economic Science Association, vol. 10(3), pages 331-344, September.
    5. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, vol. 80(1), pages 234-248, March.
    6. Besancenot, Damien & Huynh, Kim & Vranceanu, Radu, 2004. "Default on sustainable public debt: illiquidity suspect convicted," Economics Letters, Elsevier, vol. 82(2), pages 205-211, February.
    7. Frank Heinemann & Rosemarie Nagel & Peter Ockenfels, 2009. "Measuring Strategic Uncertainty in Coordination Games," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(1), pages 181-221.
    8. Besancenot, Damien & Vranceanu, Radu, 2011. "Banks' risk race: A signaling explanation," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 784-791, October.
    9. Radu Vranceanu & Damien Besancenot & Delphine Dubart, 2014. "Can Rumors and Other Uninformative Messages Cause Illiquidity ?," CEPN Working Papers hal-00841167, HAL.
    10. Lasse Pedersen, 2009. "When Everyone Runs for the Exit," International Journal of Central Banking, International Journal of Central Banking, vol. 5(4), pages 177-199, December.
    11. Morris, Stephen & Shin, Hyun Song, 2004. "Coordination risk and the price of debt," European Economic Review, Elsevier, vol. 48(1), pages 133-153, February.
    12. Reinhart, Carmen & Rogoff, Kenneth, 2009. "This Time It’s Different: Eight Centuries of Financial Folly-Preface," MPRA Paper 17451, University Library of Munich, Germany.
    13. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    14. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    15. Marcus Miller & Joseph Stiglitz, 2010. "Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?," Economic Journal, Royal Economic Society, vol. 120(544), pages 500-518, May.
    16. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    17. Giovanna Devetag, 2003. "Coordination and Information in Critical Mass Games: An Experimental Study," Experimental Economics, Springer;Economic Science Association, vol. 6(1), pages 53-73, June.
    18. Philippine Cour-Thimann & Bernhard Winkler, 2012. "The ECB’s non-standard monetary policy measures: the role of institutional factors and financial structure," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 28(4), pages 765-803, WINTER.
    19. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    20. Damien Besancenot & Radu Vranceanu, 2007. "Financial Instability under a Flexible Exchange Rate," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 291-302, June.
    21. Berninghaus, Siegfried K. & Ehrhart, Karl-Martin, 2001. "Coordination and information: recent experimental evidence," Economics Letters, Elsevier, vol. 73(3), pages 345-351, December.
    22. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, vol. 90(2), pages 1-16, May.
    23. Frank Heinemann, 2000. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 316-318, March.
    24. John Bryant, 1983. "A Simple Rational Expectations Keynes-type Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(3), pages 525-528.
    25. Damien Besancenot & Radu Vranceanu, 2011. "Banks risk race: A signaling explanation," CEPN Working Papers halshs-00424214, HAL.
    26. Schotter, Andrew & Yorulmazer, Tanju, 2009. "On the dynamics and severity of bank runs: An experimental study," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 217-241, April.
    27. Frank Heinemann & Rosemarie Nagel & Peter Ockenfels, 2004. "The Theory of Global Games on Test: Experimental Analysis of Coordination Games with Public and Private Information," Econometrica, Econometric Society, vol. 72(5), pages 1583-1599, September.
    28. Viktoriya Semeshenko & Alexis Garapin & Bernard Ruffieux & Mirta Gordon, 2010. "Information-driven coordination: experimental results with heterogeneous individuals," Theory and Decision, Springer, vol. 69(1), pages 119-142, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Peia, Oan & Vranceanu, Radu, 2017. "Experimental evidence on bank runs under partial deposit insurance," ESSEC Working Papers WP1705, ESSEC Research Center, ESSEC Business School.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Damien Besancenot & Radu Vranceanu, 2011. "Experimental evidence on the "insidious" illiquidity risk," CEPN Working Papers halshs-00602107, HAL.
    2. Damien Besancenot & Radu Vranceanu, 2011. "Experimental Evidence on the 'Insidious' Illiquidity Risk," Post-Print hal-00607867, HAL.
    3. Damien Besancenot & Radu Vranceanu, 2011. "Experimental Evidence on the 'Insidious' Illiquidity Risk," CEPN Working Papers hal-00607867, HAL.
    4. Peia, Oana & Vranceanu, Radu, 2019. "Experimental evidence on bank runs with uncertain deposit coverage," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 214-226.
    5. Radu Vranceanu & Damien Besancenot & Delphine Dubart, 2014. "Can Rumors and Other Uninformative Messages Cause Illiquidity ?," CEPN Working Papers hal-00841167, HAL.
    6. Olga Shurchkov, 2013. "Coordination and learning in dynamic global games: experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 16(3), pages 313-334, September.
    7. Angeletos, G.-M. & Lian, C., 2016. "Incomplete Information in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1065-1240, Elsevier.
    8. Chakravarty, Surajeet & Choo, Lawrence & Fonseca, Miguel A. & Kaplan, Todd R., 2021. "Should regulators always be transparent? a bank run experiment," European Economic Review, Elsevier, vol. 136(C).
    9. Radu, Vranceanu & Besancenot, Damien & Dubart, Delphine, 2013. "Can Rumors and Other Uninformative Messages Cause Illiquidity ?," ESSEC Working Papers WP1309, ESSEC Research Center, ESSEC Business School, revised Jun 2014.
    10. Shurchkov, Olga, 2016. "Public announcements and coordination in dynamic global games: Experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 61(C), pages 20-30.
    11. repec:hal:journl:hal-00841167 is not listed on IDEAS
    12. Antonio Cabrales & Rosemarie Nagel & Roc Armenter, 2007. "Equilibrium selection through incomplete information in coordination games: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 10(3), pages 221-234, September.
    13. Helland, Leif & Iachan, Felipe S. & Juelsrud, Ragnar E. & Nenov, Plamen T., 2021. "Information quality and regime change: Evidence from the lab," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 538-554.
    14. Giovanna Devetag & Andreas Ortmann, 2007. "When and why? A critical survey on coordination failure in the laboratory," Experimental Economics, Springer;Economic Science Association, vol. 10(3), pages 331-344, September.
    15. Xavier Vives, 2014. "Strategic Complementarity, Fragility, and Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 27(12), pages 3547-3592.
    16. Masiliūnas, Aidas, 2017. "Overcoming coordination failure in a critical mass game: Strategic motives and action disclosure," Journal of Economic Behavior & Organization, Elsevier, vol. 139(C), pages 214-251.
    17. Basteck, Christian & Daniëls, Tijmen R. & Heinemann, Frank, 2010. "Characterising equilibrium selection in global games with strategic complementarities," SFB 649 Discussion Papers 2010-008, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    18. Trautmann, Stefan T. & Vlahu, Razvan, 2013. "Strategic loan defaults and coordination: An experimental analysis," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 747-760.
    19. John Van Huyck & Ajalavat Viriyavipart & Alexander L. Brown, 2018. "When less information is good enough: experiments with global stag hunt games," Experimental Economics, Springer;Economic Science Association, vol. 21(3), pages 527-548, September.
    20. Basteck, Christian & Daniëls, Tijmen R. & Heinemann, Frank, 2013. "Characterising equilibrium selection in global games with strategic complementarities," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2620-2637.
    21. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275, Cowles Foundation for Research in Economics, Yale University.

    More about this item

    Keywords

    Coordination game; Illiquidity risk; Threshold strategy; Overconfidence;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reecon:v:68:y:2014:i:4:p:315-323. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622941 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.