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A model of financial market liquidity based on intermediary capital

By Denis Gromb and Dimitri Vayanos

Abstract

We present a model of financial market liquidity provided by financially constrained intermediaries. We show that market liquidity increases with the level of intermediary capital.We also characterize conditions under which intermediaries play a stabilizing or destabilizing role in markets. Finally, we sketch a number of areas, including welfare and public policy, on which the model can shed light

Topics: HG Finance
Publisher: Wiley-Blackwell on behalf of the European Economic Association
Year: 2010
DOI identifier: 10.1111/j.1542-4774.2010.tb00516.x
OAI identifier: oai:eprints.lse.ac.uk:29778
Provided by: LSE Research Online
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