Episodic liquidity crises: Cooperative and predatory trading

Journal Article (Journal Article)

We describe how episodic illiquidity arises from a breakdown in cooperation between market participants. We first solve a one-period trading game in continuous-time, using an asset pricing equation that accounts for the price impact of trading. Then, in a multi-period framework, we describe an equilibrium in which traders cooperate most of the time through repeated interaction, providing apparent liquidity to one another. Cooperation breaks down when the stakes are high, leading to predatory trading and episodic illiquidity. Equilibrium strategies that involve cooperation across markets lead to less frequent episodic illiquidity, but cause contagion when cooperation breaks down. © 2007 by The American Finance Association.

Full Text

Duke Authors

Cited Authors

  • Carlin, BI; Lobo, MS; Viswanathan, S

Published Date

  • October 1, 2007

Published In

Volume / Issue

  • 62 / 5

Start / End Page

  • 2235 - 2274

Electronic International Standard Serial Number (EISSN)

  • 1540-6261

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/j.1540-6261.2007.01274.x

Citation Source

  • Scopus