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.
JEL Classification: G1;
File format is text/html
Description: Full text
Provider: Federal Reserve Bank of New York
Part of Series: Liberty Street Economics
Publication Date: 2011-12-19