Paper #1003

Títol:

On the impact of fundamentals, liquidity and coordination on market stability

Autors:

Francisco Peñaranda i Jón Daníelsson

Data:

Gener 2007

Resum:

We develop a coordination game to model interactions between fundamentals and liquidity during unstable periods in financial markets. We then propose a flexible econometric framework for estimation of the model and analysis of its quantitative implications. The specific empirical application is carry trades in the yen–dollar market, including the turmoil of 1998. We find a generally very deep market, with low information disparities amongst agents. We observe occasionally episodes of market fragility, or turmoil with up by the escalator, down by the elevator patterns in prices. The key role of strategic behavior in the econometric model is also confirmed.

Paraules clau:

global games, efficient method of moments, carry trades, tail risk, strategic behavior, financial crises

Codis JEL:

C13, C15, C22, C51, F31, G12, G15

Àrea de Recerca:

Finances i Comptabilitat / Estadística, Econometria i Mètodes Quantitatius

Publicat a:

International Economic Review, 52, pp. 621-638, 2011.

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