Degreasing the wheels of finance

Aleksander Berentsen, Samuel Huber, Alessandro Marchesiani

Research output: Contribution to journalArticle

21 Citations (Scopus)
131 Downloads (Pure)

Abstract

Can there be too much trading in financial markets? We construct a dynamic general equilibrium model, where agents face idiosyncratic liquidity shocks. A financial market allows agents to adjust their portfolio of liquid and illiquid assets in response to these shocks. The optimal policy is to restrict access to this market because portfolio choices exhibit a pecuniary externality: Agents do not take into account that by holding more of the liquid asset, they not only acquire additional insurance against these liquidity shocks, but also marginally increase the value of the liquid asset, which improves insurance for other market participants.
Original languageEnglish
Pages (from-to)735-763
Number of pages9
JournalInternational Economic Review
Volume55
Issue number3
Early online date28 Jul 2014
DOIs
Publication statusPublished - 1 Aug 2014

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    Berentsen, A., Huber, S., & Marchesiani, A. (2014). Degreasing the wheels of finance. International Economic Review, 55(3), 735-763. https://doi.org/10.1111/iere.12069