Xavier Vives, IESE Business School, University of Navarra

Campus WU Vienna D3.0.225 11:00 - 12:15

Organizer VGSF

As part of the series of the „Finance Research Seminar“, VGSF welcomes Xavier Vives, IESE Business School from University of Navarra to present his research paper.
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Market opacity and fragility: Why liquidity evaporates when it is most needed

We show that, consistent with empirical evidence, access to order flow information allows traders to supply liquidity via contrarian marketable orders. Lack of market transparency can make liquidity demand upward sloping, inducing strategic complementarity and multiple equilibria. Then an initial dearth of liquidity may degenerate into a liquidity rout (as in a flash crash) and traders faced with the largest cost of trading are those consuming more liquidity at equilibrium. An increase in order flow transparency and/or in the mass of dealers who are in the market at all times has a positive impact on total welfare.

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