Fragility of Safe Asset Markets

Financial Fragility , Liquidity , and Asset Prices

We de…ne a …nancial system to be fragile if small shocks have disproportionately large e¤ects. In a model of …nancial intermediation, we show that small shocks to the demand for liquidity cause either high assetprice volatility or bank defaults or both. Furthermore, as the liquidity shocks become vanishingly small, the asset-price volatility is bounded away from zero. In the limit economy, with...

Interpretable Asset Markets?

In this paper we show that measures of economic uncertainty (conditional volatility of consumption) predict and are predicted by valuation ratios at long horizons. Further we document that asset valuations drop as economic uncertainty rises — that is, financial markets dislike economic uncertainty. Moreover, future earnings growth rates are sharply predicted by current price-earnings ratios. It...

Search in Asset Markets

We investigate how trading frictions in asset markets affect portfolio choices, asset prices and efficiency. We generalize the search-theoretic model of financial intermediation of Duffie, Gârleanu and Pedersen (2005) to allow for more general preferences and idiosyncratic shock structure, unrestricted portfolio choices, aggregate uncertainty and entry of dealers. With a fixed measure of dealer...

Dynamically Complete Experimental Asset Markets

We design an experiment to compare investors’ final wealth distribution in a static setup and an equivalent dynamic setup. In the static setup investors can trade all risks since there are as many securities as states of the world. In the dynamic market there are too few securities for investors to achieve efficient final wealth holdings without re-trade. Information disclosure and the possibil...

Liquidity in Frictional Asset Markets