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Inefficient Fire-Sales in Decentralized Asset Markets
by Ehsan Ebrahimy

Series:Working Paper No. 19/92
ISBN 9781498303804
Code: #WPIEA2019092

Publication year: 2019

Cdn: $27.00; US: $25.00
Language: English
39 pages
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Classic models of fire-sales that emphasize liquidity-constrained natural buyers can-not fully account for the asset fire-sales during the Financial Crisis of 2008. I present a model to demonstrate that fire-sales may happen even when there is a sizable pool of natural buyers and in the absence of asymmetric information, due to a coordina-tion failure among buyers. In particular, I show that when trade is decentralized and participation is endogenous, constrained asset demand and liquidity needs that are ex-pected to increase over time create complementarity among buyers’ decisions to wait. This complementarity makes competitive markets prone to coordination failures and fire-sales which may be inefficient. I also discuss various policy options to eliminate the risk of fire-sales in such a setup.
Inefficient Fire-Sales in Decentralized Asset Markets
Cdn: $27.00; US: $25.00
International Monetary Fund (IMF) BookID: 124933 Added: 2019.5.11