Inefficient Fire-Sales in Decentralized Asset Markets

Author/Editor:

Ehsan Ebrahimy

Publication Date:

May 6, 2019

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Classic models of fire-sales that emphasize liquidity-constrained natural buyers can-not fully account for the asset fire-sales during the Financial Crisis of 2008. I present a model to demonstrate that fire-sales may happen even when there is a sizable pool of natural buyers and in the absence of asymmetric information, due to a coordina-tion failure among buyers. In particular, I show that when trade is decentralized and participation is endogenous, constrained asset demand and liquidity needs that are ex-pected to increase over time create complementarity among buyers’ decisions to wait. This complementarity makes competitive markets prone to coordination failures and fire-sales which may be inefficient. I also discuss various policy options to eliminate the risk of fire-sales in such a setup.

Series:

Working Paper No. 19/92

Subject:

English

Publication Date:

May 6, 2019

ISBN/ISSN:

9781498303804/1018-5941

Stock No:

WPIEA2019092

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

39

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