Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality / Veronica Guerrieri, Robert Shimer.

Format:

Book

Author/Creator:

Guerrieri, Veronica.

Contributor:

National Bureau of Economic Research.

Shimer, Robert.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17876.

NBER working paper series no. w17876

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

We develop a dynamic equilibrium model of asset markets affected by adverse selection. There exists a unique equilibrium where better assets trade at higher prices but in less liquid markets. Sellers of high-quality assets can separate because they are more willing to accept a lower trading probability. As a result, the emergence of adverse selection generates a drop in liquidity. It may also lead to a decline in the price-dividend ratio--a fire sale--and a flight to quality. Subsidies to purchasing assets may be Pareto improving and can reverse the fire sale and flight to quality.

Notes:

Print version record

March 2012.