Liquidity and fire sales

Abstract

A “fire sale” occurs when the owner of a good offers it for sale at a price strictly below the price that some buyers would willingly pay for the good. He does so because the advantage of the quick sale made possible by the lower price outweighs the higher price that other potential buyers would pay, given the likely delay in locating these buyers in the latter case. Fire sales can occur only in illiquid markets. This paper generalizes earlier treatments of illiquid markets by assuming that the asset can be offered for sale at any time, rather than only after its owner loses his capacity to operate it profitably. Also, it specifies that profitability follows a random walk.Liquidity (Economics) ; Econometric models