Vanishing Liquidity, Market Runs, and the WelfareImpact of TARP

I model a financial market that dries out in the wake of premature liquidations.Two main results are obtained. First, liquidity may vanish even if small, riskneutralbuyers could easily compensate the ongoing selling. Thus, more marketsare vulnerable to “runs” than suggested by previous work. Second, the scale ofpremature liquidations is not informative about welfare losses.[...]

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Year of publication:	2009-01-19
Authors:	Ewerhart, Christian
Institutions:	Swiss National Centre of Competence in Research North South <Bern>
Subject:	Kreditmarkt \| Liquidität \| Wohlfahrtseffekt \| Marktergebnis

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1. Introduction
2. The model
3. Runs with standby investors
4. Constrained efficient trading
5. Nearly constrained efficient market runs
6. Strong purchasing power
7. The Troubled Assets Relief Program
8. Conclusion
Appendix. Characterization of the equilibrium
References

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