Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/171378 
Year of Publication: 
2017
Series/Report no.: 
Economics Discussion Papers No. 2017-103
Publisher: 
Kiel Institute for the World Economy (IfW), Kiel
Abstract: 
The authors theoretically analyze the efficiency of liquidity flows in stabilizing distressed markets. Their analysis focuses on the incentives for financial institutions; specifically, they focus on arbitrage profit as an incentive and liquidity risk as a disincentive. The authors show that even with a major negative market shock, a financial institution can increase its market investment if it has sufficient funding liquidity. In addition, their model reveals a positive relationship between funding liquidity and liquidity flows. Thus, a distressed market might stabilize more quickly when financial institutions, acting as liquidity providers, have sufficient funding to bear the market's liquidity risk.
Subjects: 
market efficiency
arbitrage profit
liquidity risk
flight to quality
distressed market
JEL: 
G14
G18
G21
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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