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Market Freezes / Chao Gu, Guido Menzio, Randall Wright, Yu Zhu.
- Format:
- Book
- Author/Creator:
- Gu, Chao.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w29210.
- NBER working paper series no. w29210
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2021.
- Summary:
- During the financial crisis apparently centralized markets continued to function while trade in OTC markets froze. We use search-and-bargaining theory to ascertain conditions that allow trade to temporarily freeze in decentralized markets, focusing on the roles of liquidity and self-fulfilling prophecies. We show standard models can have recurrent, belief-driven hot and cold spells, but not freezes and thaws. A simple specification that has freezes assumes negative returns. A more realistic one incorporates information frictions (costly asset-quality verification). Another uses different frictions to get credit freezes. We also discuss policy implications, and go into detail on the nature of OTC markets.
- Notes:
- Print version record
- September 2021.
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