Date of this Version
Journal of Banking and Finance
We show how a high degree of commonality in investor liquidity shocks can diminish incentives for intermediaries to keep markets open and lead to market collapse, even without information asymmetry or news affecting fundamentals. We motivate our model using the perpetual floating-rate note market where two years of explosive growth – in which issues by high quality borrowers were placed with institutional investors and traded in a liquid secondary market – were followed by a precipitous collapse when market intermediaries withdrew due to large order imbalances. We shed new light on the trade-off between ownership concentration and market liquidity.
© 2008. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/.
Fernando, C. S., Herring, R. J., & Subrahmanyam, A. (2008). Common Liquidity Shocks and Market Collapse: Lessons From the Market for Perps. Journal of Banking and Finance, 32 (8), 1625-1635. http://dx.doi.org/10.1016/j.jbankfin.2007.11.011
Date Posted: 27 November 2017
This document has been peer reviewed.