Crises and Liquidity in Over-the-Counter Markets

This paper is a substantial revision of an earlier draft that was circulated in 2007 under the title "Crashes and Recoveries in Illiquid Markets." We thank Tobias Adrian, Gara Afonso, Jonathan Chiu, Joe Haubrich, Antoine Martin, Thomas Sargent, Ruilin Zhou for comments and Monica Crabtree-Reusser for editorial assistance. We also thank seminar participants at Mannheim University, National University of Singapore, Singapore Management University, University of Southern California, University of Toulouse, the 2006 Workshop on Money, Banking and Payments at the Federal Reserve Bank of Cleveland, the 2007 Midwest Macro Conference, the 2007 Conference on Microfoundations of Markets with Frictions in Montreal, the 2007 SED meetings, the Fuqua School of Business, the UCSB-LAEF Conference on Trading Frictions in Asset Markets, the Universidad Torcuato di Tella, the 2009 Minnesota Workshop in Macroeconomic Theory, the 2009 Bank of Canada Workshop on Payment Systems and Central Banking, and the Federal Reserve Bank of New York. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland, the Federal Reserve System, or the National Bureau of Economic Research. Lagos thanks the C. V. Starr Center for Applied Economics at NYU for financial support.