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suggestions. I also thank Narayana Kocherlakota for fruitful discussions and suggestions. I (2004)
BibTeX
@MISC{Weill04suggestions.i,
author = {Pierre-olivier Weill and Tom Sargent and Their Encouragements and Marco Bassetto and Vinicius Carrasco and John Y and Arvind Krishnamurthy and Hanno Lustig and Erzo Luttmer and Eva Nagypal and Lasse Heje Pedersen and Esteban Rossi-hansberg and Tuomo Vuolteenaho and Ivan Werning and Y Wright and Mark Wright and Bill Zame},
title = {suggestions. I also thank Narayana Kocherlakota for fruitful discussions and suggestions. I},
year = {2004}
}
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Abstract
During financial disruptions, marketmakers provide liquidity by absorbing external selling pressure. They buy when the pressure is large, accumulate inventories, and sell when the pressure alleviates. This paper studies optimal dynamic liquidity provision in a theoretical market setting with large and temporary selling pressure, and order-execution delays. I show that competitive marketmakers offer the socially optimal amount of liquidity, provided they have access to sufficient capital. If raising capital is costly, this suggests a policy role for lenient centralbank lending during financial disruptions.
Keyphrases
narayana kocherlakota fruitful discussion financial disruption sufficient capital lenient centralbank lending theoretical market optimal amount competitive marketmakers accumulate inventory dynamic liquidity provision policy role paper study external selling pressure order-execution delay temporary selling pressure
