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ON THE IMPACT OF FUNDAMENTALS, LIQUIDITY, AND COORDINATION ON MARKET STABILITY *
Author(s) -
Daníelsson Jón,
Peñaranda Francisco
Publication year - 2011
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2011.00642.x
Subject(s) - market liquidity , economics , liberian dollar , fragility , econometric model , estimation , market impact , financial market , monetary economics , carry (investment) , econometrics , financial economics , market microstructure , macroeconomics , finance , order (exchange) , chemistry , management
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 among agents. We observe occasional 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.