Degreasing the wheels of finance

Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani

doi:10.1111/iere.12069

Degreasing the wheels of finance

Aleksander Berentsen, Samuel Huber, Alessandro Marchesiani

Department of Economics

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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 language	English
Pages (from-to)	735-763
Number of pages	9
Journal	International Economic Review
Volume	55
Issue number	3
Early online date	28 Jul 2014
DOIs	https://doi.org/10.1111/iere.12069
Publication status	Published - 1 Aug 2014

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10.1111/iere.12069

IER - DEGREASING THE WHEELS OF FINANCE
This is the peer reviewed version of the following article: Berentsen, A. , Huber, S. and Marchesiani, A. (2014), DEGREASING THE WHEELS OF FINANCE. International Economic Review, 55: 735-763. doi:10.1111/iere.12069, which has been published in final form at https://doi.org/10.1111/iere.12069. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
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Cite this

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Degreasing the wheels of finance

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