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A Tale of Fire-Sales and Liquidity Hoarding

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  • Aleksander Berentsen
  • Dr. Benjamin Müller

Abstract

We extend the analysis of the theoretical interbank market model of Gale and Yorulmazer (2013) by introducing randomized trading (lotteries). In contrast to Gale and Yorulmazer, we find that fire-sale asset prices are efficient and that no liquidity hoarding occurs in equilibrium with lotteries. While Gale and Yorulmazer find that the market provides insufficient liquidity, we find that it provides too much liquidity when introducing lotteries. We also show how to decentralize the efficient lottery mechanism.

Suggested Citation

  • Aleksander Berentsen & Dr. Benjamin Müller, 2017. "A Tale of Fire-Sales and Liquidity Hoarding," Working Papers 2017-16, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2017-16
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    References listed on IDEAS

    as
    1. Berentsen, Aleksander & Molico, Miguel & Wright, Randall, 2002. "Indivisibilities, Lotteries, and Monetary Exchange," Journal of Economic Theory, Elsevier, vol. 107(1), pages 70-94, November.
    2. Heider, F. & Hoerova, M. & Holthausen, C., 2009. "Liquidity Hoarding and Interbank Market Spreads : The Role of Counterparty Risk," Discussion Paper 2009-40 S, Tilburg University, Center for Economic Research.
    3. Chatterjee, Satyajit & Corbae, Dean, 1995. "Valuation Equilibria with Transactions Costs," American Economic Review, American Economic Association, vol. 85(2), pages 287-290, May.
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    5. Viral V. Acharya & Ouarda Merrouche, 2013. "Precautionary Hoarding of Liquidity and Interbank Markets: Evidence from the Subprime Crisis," Review of Finance, European Finance Association, vol. 17(1), pages 107-160.
    6. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
    7. 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.
    8. Berentsen, Aleksander & Rocheteau, Guillaume, 2002. "On the efficiency of monetary exchange: how divisibility of money matters," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1621-1649, November.
    9. Gara Afonso & Anna Kovner & Antoinette Schoar, 2011. "Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis," Journal of Finance, American Finance Association, vol. 66(4), pages 1109-1139, August.
    10. Shell, Karl & Wright, Randall, 1993. "Indivisibilities, Lotteries, and Sunspot Equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(1), pages 1-17, January.
    11. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
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    More about this item

    Keywords

    Fire-sales; lotteries; liquidity hoarding; interbank markets; indivisibility;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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