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Experimental Evidence on the ‘Insidious’ Illiquidity Risk

Author

Listed:
  • Vranceanu, Radu

    (ESSEC Business School)

  • Besancenot, Damien

    (Université Paris 13)

Abstract

This paper brings experimental evidence on investors’ behavior subject to an "illiquidity" constraint, where the success of a risky project depends on the participation of a minimum number of investors. The experiment is set up as a frameless coordination game that replicates the investment context. Results confirm the insidious nature of the illiquidity risk: as long as a first illiquidity default does not occur, investors do not seem able to fully internalize it. After several defaults, agents manage to coordinate on a default probability above which they refuse to participate to the project. This default probability is lower than the default probability of the first illiquidity default.

Suggested Citation

  • Vranceanu, Radu & Besancenot, Damien, 2011. "Experimental Evidence on the ‘Insidious’ Illiquidity Risk," ESSEC Working Papers WP1107, ESSEC Research Center, ESSEC Business School.
    • Handle: RePEc:ebg:essewp:dr-11007
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    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.

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    More about this item

    Keywords

    Coordination game; Illiquidity risk; Threshold strategy; Experimental economics;
    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

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