TY  - JOUR
AU  - Lagos,Ricardo
AU  - Rocheteau,Guillaume
AU  - Weill,Pierre-Olivier
TI  - Crashes and Recoveries in Illiquid Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14119
PY  - 2008
Y2  - June 2008
UR  - http://www.nber.org/papers/w14119
L1  - http://www.nber.org/papers/w14119.pdf
N1  - Author contact info:
Ricardo Lagos
Department of Economics
New York University
19 West Fourth Street
New York, NY 10014
Tel: 212/998-8937
E-Mail: ricardo.lagos@nyu.edu

Guillaume Rocheteau
Department of Economics
University of California at Irvine
3151 Social Science Plaza
Irvine, California 9269
E-Mail: grochete@uci.edu

Pierre-Olivier Weill
Department of Economics
University of California, Los Angeles
Bunche Hall 8283
Los Angeles, CA 90095
Tel: 310/794-6495
Fax: 310/825-9528
E-Mail: poweill@econ.ucla.edu
AB  - We study the dynamics of liquidity provision by dealers during an asset market crash, described as a temporary negative shock to investors aggregate asset demand. We consider a class of dynamic market settings where dealers can trade continuously with each other, while trading between dealers and investors is subject to delays and involves bargaining. We derive conditions on fundamentals, such as preferences, market structure and the characteristics of the market crash (e.g., severity, persistence) under which dealers provide liquidity to investors following the crash. We also characterize the conditions under which dealers incentives to provide liquidity are consistent with market efficiency.
ER  -