Liquidity and the Threat of Fraudulent Assets

Yiting Li, Guillaume Rocheteau, Pierre-Olivier Weill

NBER Working Paper No. 17500
Issued in October 2011
NBER Program(s):   AP   EFG   ME

We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as collateral in the OTC market. Each endogenous, asset-specific, resalability constraint depends on the vulnerability of the asset to fraud, on the frequency of trade, and on the current and future prices of the asset. In equilibrium, the set of assets can be partitioned into three liquidity tiers, which differ in their resalability, their prices, their sensitivity to shocks, and their responses to policy interventions. The dependence of an asset's resalability on its price creates a pecuniary externality, which leads to the result that some policies commonly thought to improve liquidity can be welfare reducing.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w17500

Published: Yiting Li & Guillaume Rocheteau & Pierre-Olivier Weill, 2012. "Liquidity and the Threat of Fraudulent Assets," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 000 - 000. citation courtesy of

Users who downloaded this paper also downloaded these:
Guerrieri and Shimer w17876 Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality
Gu and Wright w17510 Endogenous Credit Cycles
Aruoba and Schorfheide w14870 Sticky Prices Versus Monetary Frictions: An Estimation of Policy Trade-offs
Lagos, Rocheteau, and Weill w15414 Crises and Liquidity in Over-the-Counter Markets
Biais, Hombert, and Weill w16628 Trading and Liquidity with Limited Cognition
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us