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Why do markets freeze?

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Listed:
  • Philip Bond
  • Yaron Leitner

Abstract

Consider the sale of mortgages by a loan originator to a buyer. As widely noted, such a transaction is subject to a severe adverse selection problem: the originator has a natural information advantage and will attempt to sell only the worst mortgages. However, a second important feature of this transaction has received much less attention: both the seller and the buyer may have existing inventories of mortgages similar to those being sold. The authors analyze how the presence of such inventories affects trade. They use their model to discuss implications for regulatory intervention in illiquid markets.

Suggested Citation

  • Philip Bond & Yaron Leitner, 2009. "Why do markets freeze?," Working Papers 09-24, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:09-24
    as

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    References listed on IDEAS

    as
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    Keywords

    Mortgage loans;

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