Articles

A Model of Financial Market Liquidity Based on Intermediary Capital

D. GROMB, D. VAYANOS

Journal of the European Economic Association

April-May 2010, vol. 8, n°2-3, pp.456-466

Departments: Finance, GREGHEC (CNRS)


We present a model of financial market liquidity provided by financially constrained intermediaries. We show that market liquidity increases with the level of intermediary capital. We also characterize conditions under which intermediaries play a stabilizing or destabilizing role in markets. Finally, we sketch a number of areas, including welfare and public policy, on which the model can shed light.


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