Discussion Paper
When Do Trade Frictions Increase Liquidity?
Abstract: Economists tend to assume that frictions that limit trading in financial markets reduce liquidity and lower investor welfare. In this blog I discuss a recent staff study of mine that challenges that conventional wisdom. I explain how introducing trading frictions—such as circuit breakers—that slow or halt trading in an over-the-counter market experiencing a fire sale might, paradoxically, lead to higher liquidity and investor welfare.
Keywords: asset pricing; search; congestion; trading halts; Liquidity;
JEL Classification: G1;
Access Documents
File(s):
File format is text/html
https://libertystreeteconomics.newyorkfed.org/2011/12/when-do-trading-frictions-increase-liquidity.html
Description: Full text
Authors
Bibliographic Information
Provider: Federal Reserve Bank of New York
Part of Series: Liberty Street Economics
Publication Date: 2011-12-19
Number: 20111219