A Model of Financial Market Liquidity Based on Intermediary Capital

15 Pages Posted: 5 Apr 2010

See all articles by Denis Gromb

Denis Gromb

HEC Paris

Dimitri Vayanos

London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: March 31, 2010

Abstract

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.

JEL Classification: G01, G11, G12, G15, G18

Suggested Citation

Gromb, Denis and Vayanos, Dimitri, A Model of Financial Market Liquidity Based on Intermediary Capital (March 31, 2010). INSEAD Working Paper No. 2010/22/FIN, Available at SSRN: https://ssrn.com/abstract=1582363 or http://dx.doi.org/10.2139/ssrn.1582363

Denis Gromb (Contact Author)

HEC Paris

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Dimitri Vayanos

London School of Economics ( email )

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London WC2A 2AE
United Kingdom
+44 (0)20 7955 6382 (Phone)
+44 (0)20 7955 7420 (Fax)

Center for Economic Policy Research (CEPR)

London
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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