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On the impact of fundamentals, liquidity and coordination on market stability
Peñaranda, Francisco; Daníelsson, Jón
Universitat Pompeu Fabra. Departament d'Economia i Empresa
We develop a coordination game to model interactions betweenfundamentals and liquidity during unstable periods in financial markets.We then propose a flexible econometric framework for estimationof the model and analysis of its quantitative implications. The specificempirical application is carry trades in the yen dollar market, includingthe turmoil of 1998. We find a generally very deep market, withlow information disparities amongst agents. We observe occasionallyepisodes of market fragility, or turmoil with up by the escalator, downby the elevator patterns in prices. The key role of strategic behaviorin the econometric model is also confirmed.
2007-04-02
Finance and Accounting
Statistics, Econometrics and Quantitative Methods
global games
efficient method of moments
carry trades
tail risk
strategic behavior
financial crises
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