Free-riding on Liquidity
Project funded by own resources
Project title Free-riding on Liquidity
Principal Investigator(s) Berentsen, Aleksander
Project Members Huber, Samuel
Marchesiani, Alessandro
Organisation / Research unit Departement Wirtschaftswissenschaften / Wirtschaftstheorie (Berentsen)
Project Website https://ideas.repec.org/p/zur/econwp/032.html
Project start 01.09.2011
Probable end 31.08.2027
Status Active
Abstract

Do financial market participants free-ride on liquidity? To address this question, we construct a dynamic general equilibrium model where agents face idiosyncratic preference and technology shocks. A secondary financial market allows agents to adjust their portfolio of liquid and illiquid assets in response to these shocks. The opportunity to do so reduces the demand for the liquid asset and, hence, its value. The optimal policy response is to restrict (but not eliminate) access to the secondary financial market. The reason for this result is that the portfolio choice exhibits a pecuniary externality: An agent does not take into account that by holding more of the liquid asset, he not only acquires additional insurance but also marginally increases the value of the liquid asset which improves insurance to other market participants.

Financed by University funds

Cooperations ()

  ID Kreditinhaber Kooperationspartner Institution Laufzeit - von Laufzeit - bis
2740264  Berentsen, Aleksander  Huber, Samuel  University of Basel  01.09.2011  31.08.2015 
2740265  Berentsen, Aleksander  Marchesiani, Alessandro  University of Minho  01.09.2011  31.08.2015 
   

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