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Liquidity Black Holes
Open accessAbstract
Traders with short horizons and privately known loss limits interact in a market for a risky asset. Risk-averse, long horizon traders generate a downward sloping residual demand curve that faces the short-horizon traders. When the price falls close to the loss limits of the short horizon traders, selling of the risky asset by any trader increases the incentives for others to sell. Sales become mutually reinforcing among the short term traders, and payoffs analogous to a bank run are generated. A “liquidity black hole” is the analogue of the run outcome in a bank run model. Short horizon traders sell because others sell. Using global game techniques, we solve for the unique trigger point at which the liquidity black hole comes into existence. Empirical implications include the sharp V-shaped pattern in prices around the time of the liquidity black hole.
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Shleifer, A., & Vishny, R. W. (1997) · The Journal of Finance · doi:10.1111/j.1540-6261.1997.tb03807.x · Cited by 5,291
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Metadata
- Authors
- Morris, S., & Shin, H. S.
- Venue
- Review of Finance
- Publisher
- Oxford University Press (OUP)
- Published
- 2004-03-01
- Volume
- 8
- Issue
- 1
- Pages
- 1-18
- ISSN
- 1382-6662 (ISSN-L)
- 1572-3097
- 1573-692X
- OpenAlex
- W2069666581
- Cited by
- 362
- References
- 1
- FWCI
- 24.96
- Type
- journal article
- Language
- en
- Open access
- green
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Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
