Correlated liquidity shocks, financial contagion and asset price dynamics

Andergassen, Rainer (2002) Correlated liquidity shocks, financial contagion and asset price dynamics. DOI 10.6092/unibo/amsacta/641.
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Abstract

Recent literature shows how the destabilising e¤ect of portfolio insurance activity on the price of the underlying asset depends on the liquidity of the asset market. We build a simple model where market timers shift capital around asset markets in order to exploit gains from temporary excess-volatility of asset prices. In this way, market timers increase the liquidity of asset markets reducing the excess volatility, while they increase the cross-market correlation, whereas long-ranged financial contagion eventually occurs. We show how liquidity of asset markets, cross-market correlation and excess volatility of asset prices depend on structural parameters of asset markets.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Andergassen, Rainer
Keywords
Correlated liquidity shocks financial contagion asset price dynamics endogenous liquidity
Subjects
DOI
Deposit date
17 Jun 2004
Last modified
17 Feb 2016 13:59
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