TY  - JOUR
AU  - Bernardo,Antonio E.
AU  - Welch,Ivo
TI  - Financial Market Runs
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9251
PY  - 2002
Y2  - October 2002
UR  - http://www.nber.org/papers/w9251
L1  - http://www.nber.org/papers/w9251.pdf
N1  - Author contact info:
Antonio Bernardo
Anderson Graduate School of Management
UC, Los Angeles
110 Westwood Plaza
Los Angeles, CA 90095
Tel: 310/825-2198
E-Mail: antonio.bernardo@anderson.ucla.edu

Ivo Welch
Anderson School at UCLA (C519)
110 Westwood Place (951481)
Los Angeles, CA 90095-1482
E-Mail: ivo.welch@anderson.ucla.edu
AB  - Our paper offers a minimalist model of a run on a financial market.  The prime ingredient is that each risk-neutral investor fears having to liquidate after a run, but before prices can recover back to fundamental values.  During the urn, only the risk-averse market-making sector is willing to absorb shares.  To avoid having to possibly liquidate shares at the marginal post-run price in which case the market-making sector will already hold a lot of share inventory and thus be more reluctant to absorb additional shares all investors may prefer selling their shares into the market today at the average run price, thereby causing the run itself.  Consequently, stock prices are low and risk is allocated inefficiently.  Liquidity runs and crises are not caused by liquidity shocks per se, but by the fear of future liquidity shocks.
ER  -