Bleck, Alexander
(2009)
Disclosure and trading games in financial markets.
PhD thesis, London School of Economics and Political Science.
Abstract
Financial market runs are the equivalent of a bank run outcome in financial markets. They occur because traders have an incentive to sell when others do so. In our model, traders with market impact who are subject to a loss limit and face uncertainty about market liquidity sell in the fear that other sellers may beat them to the market. The result is a coordinated sell-off that leaves all traders worse off. Using global game techniques, we characterize a unique equilibrium in which this run outcome or liquidity black hole comes into existence. Counter to common intuition, we argue that traders, who are active in the same market and hence expose themselves to identical risks, may overcome these liquidity black holes through sufficiently strong financial interlinkages.
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