Liquidity and Crises

Edited by Franklin Allen, Elena Carletti, Jan Pieter Krahnen, and Marcel Tyrell

Comprehensive collection of recent papers on the economics of market liquidity, written by the leading theoreticians in the world
Shows the struggle among economists to understand the determinants of liquidity in markets, the lack of which is seen by many as one of the major challenges for financial economics after the current crisis
Not just one person's view on the subject as most of the competing books are. Instead it includes the leading theories of liquidity as they relate to financial crises

Liquidity and Crises

Edited by Franklin Allen, Elena Carletti, Jan Pieter Krahnen, and Marcel Tyrell

Description

Financial crises have been pervasive for many years. Their frequency in recent decades has been double that of the Bretton Woods Period (1945-1971) and the Gold Standard Era (1880-1993), comparable only to the period during the Great Depression. Nevertheless, the financial crisis that started in the summer of 2007 came as a great surprise to most people. What initially was seen as difficulties in the U.S. subprime mortgage market, rapidly escalated and spilled over first to financial markets and then to the real economy. The crisis changed the financial landscape worldwide and its full costs are yet to be evaluated.

One important reason for the global impact of the 2007-2009 financial crisis was massive illiquidity in combination with an extreme exposure of many financial institutions to liquidity needs and market conditions. As a consequence, many financial instruments could not be traded anymore, investors ran on a variety of financial institutions particularly in wholesale markets, financial institutions and industrial firms started to sell assets at fire sale prices to raise cash, and central banks all over the world injected huge amounts of liquidity into financial systems.
But what is liquidity and why is it so important for firms and financial institutions to command enough liquidity? This book brings together classic articles and recent contributions to this important field of research. It is divided into five parts. These are (i) liquidity and interbank markets; (ii) the public provision of liquidity and regulation; (iii) money, liquidity and asset prices; (iv) contagion effects; (v) financial crises and currency crises. The aim is to provide a comprehensive coverage of role of liquidity in financial crises.

Liquidity and Crises

Edited by Franklin Allen, Elena Carletti, Jan Pieter Krahnen, and Marcel Tyrell

1.: An Introduction to Liquidity and Crises
Franklin Allen, Elena Carletti, Jan Pieter Krahnen, and Marcel Tyrell
Section 1: Liquidity and Interbank Markets
2.:Preference Shocks, Liquidity and Central Bank Policy
Sudipto Bhattacharya/Douglas Gale (London School of Economics/New York University)
W. Barnett and K. Singleton, eds., New Approaches to Monetary Economics, Cambridge University Press, 1987, pp. 69-88.
3.: Endogenous Liquidity in Asset Markets
Andrea Eisfeldt (Northwestern University)
Journal of Finance, February 2004, 59, pp.1-30
4.:Financial Intermediaries and Markets
Franklin Allen/Douglas Gale (The Wharton School, University of Pennsylvania/New York University)
Econometrica, 72(4), July 2004, pp. 1023-106.1
5.: Financial Fragility, Liquidity and Asset Prices
Franklin Allen/Douglas Gale (The Wharton School, University of Pennsylvania/New York University)
Journal of the European Economic Association, 2(6), December 2004, pp. 1015-1048.
6.: Interbank Market Integration under Asymmetric Information
Xavier Freixas/Cornelia Holthausen (Universitat Pompeu Fabra, Barcelona/European Central Bank, Frankfurt)
Review of Financial Studies, 18(2), Summer 2005, pp. 459-90.
7.:Banks as Monitors of Other Banks: Evidence from the Overnight Federal Funds Markets
Craig Furfine (Federal Reserve Bank of Chicago)
Journal of Business, January 2001, 74, 33-57.
Section 2: Public Provision of Liquidity and Regulation
8.: Private and Public Supply of Liquidity
Bengt Holmstrom/Jean Tirole (MIT/ Universite Sciences Sociales, Toulouse)
Journal of Political Economy, February 1998, 106, pp.1-40.
9.:Liquidity, Efficiency and Bank Bailouts
Gary Gorton/Lixin Huang (The Wharton School, University of Pennsylvania/Georgia State University)
American Economic Review, 94(3), June 2004, pp. 455-483.
10.: Financial Crises, Payments System Problem and Discount Window Lending
Mark Flannery (University of Florida)
Journal of Money, Credit and Banking, November 1996, 28(4), pp. 804-824.
11.: Liquidity, Risk Taking, and the Lender of Last Resort
Rafael Repullo (CEMFI)
International Journal of Central Banking, 1, December 2005, pp. 47-80.
12.: Coordination Failures and the Lender of Last Resort: Was Bagehot Right after all?
Jean-Charles Rochet/Xavier Vives (University Sciences Sociales, Toulouse/IESE, University of Navarra)
Journal of the European Economic Association, 2(6), December 2004, pp. 1116-47.
13.: Competition among Regulators and Credit Market Integration
Giovanni Dell'Ariccia/Robert Marquez (IMF/Arizona State University)
Journal of Financial Economics, 79(2), February 2006, pp. 401-30.
Section 3: Money, Liquidity Crises and Asset Prices
14.: Money in a Theory of Banking
Douglas Diamond/Raghuram Rajan (University of Chicago)
American Economic Review, 96(1), March 2006, pp. 30-53.
15.: Liquidity and Asset Prices
Nobuhiro Kiyotaki/John Moore (Princeton University/University of Edinburgh)
International Economic Review, 46(2), May 2005, pp. 317-49
16.:Collateral Constraints in a Monetary Economy
Juan Cordoba/Marla Ripoll (Rice University/University of Pittsburgh)
Journal of the European Economic Association, 2(6), December 2004, pp. 1172-1205.
17.: Inefficient Credit Booms
Guido Lorenzoni (MIT)
Review of Economic Studies, 75(3), July 2008, pp. 809-833.
Section 4: Contagion Effects in Financial Crises
18.:Financial Contagion through Capital Connections: A Model of the Origin and Spread of Bank Panics
Amil Dasgupta (London School of Economics and Political Science)
Journal of the European Economic Association, 2(6), December 2004, pp. 1049-84.
19.: Information Contagion and Bank Herding
Viral V. Acharya/Tanju Yorulmazer (London Business School/Federal Reserve Bank of New York)
Journal of Money, Credit and Banking, February 2008, 40(1), pp. 215-231.
20.: Cash-in-the-market Pricing and Optimal Resolution of Bank Failures
Viral V. Acharya/Tanju Yorulmazer (London Business School/Federal Reserve Bank of New York)
Review of Financial Studies, November 2008, 21, pp. 2705-2742.
21.: Credit Risk Transfer and Contagion
Franklin Allen/Elena Carletti (The Wharton School, University of Pennsylvania/ J.W. Goethe-Universitat Frankfurt and CFS)
Journal of Monetary Economics, 2008, 53, 89-111.
22.:Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?
Christian Upper/Andreas Worms (Bank for International Settlements/Deutsche Bundesbank)
European Economic Review, 48(4), August 2004, pp. 827-49.
Section 5: Financial Crises and Currency Crises
23.: Asset Market Linkages in Crisis Periods
Philipp Hartmann/Stefan Straetmans/Casper de Vries (European Central Bank/Maastricht University/Erasmus Universiteit Rotterdam)
Review of Economics and Statistics, 86(1), February 2004, pp. 313-326.
24.: Strategic Complementarities and the Twin Crises
Itay Goldstein (University of Pennsylvania)
Economic Journal, 115(503), April 2005, pp. 368-90
25.: Inefficient Foreign Borrowing: A Dual-and-Common-Agency Perspective
Jean Tirole (Universite Sciences Sociales, Toulouse)
American Economic Review, 93(5), December 2003, pp. 1678-1702.
26.: Exchange Rate Volatility and the Credit Channel in Emerging Markets: A "Vertical" Analysis
Ricardo Caballero/Arvind Krishnamurthy (MIT/Northwestern University)
International Journal of Central Banking, 1(1), June 2005, pp. 207-45.

Liquidity and Crises

Edited by Franklin Allen, Elena Carletti, Jan Pieter Krahnen, and Marcel Tyrell

Author Information

Edited by Franklin Allen, Nippon Life Professor of Finance and Professor of Economics, The Wharton School of the University of Pennsylvania, Elena Carletti, Professor of Economics, European University Institute, Jan Pieter Krahnen, Chair of Corporate Finance, Johann Wolfgang Goethe-University Frankfurt, and Marcel Tyrell, Professor of Entrepreneurship & Finance, Zeppelin University, Friedrichshafen

Franklin Allen is the Nippon Life Professor of Finance and Professor of Economics at the Wharton School of the University of Pennsylvania. He has been on the faculty since 1980. He is currently Co-Director of the Wharton Financial Institutions Center. He is a past President of the American Finance Association. Elena Carletti is Professor of Economics at the European University Institute and Joint Chair of the Economics Department and Robert Schuman Center for Advanced Studies. Jan Pieter Krahnen is Chair of Corporate Finance at Johann Wolfgang Goethe-University Frankfurt. Marcel Tyrell is Professor of Entrepreneurship & Finance at Zeppelin University, Friedrichshafen

Contributors:

Tanju Yorulmazer
Federal Reserve Bank of New York
Viral Acharya
New York University
Elena Carletti
European University Institute
Professor Douglas Gale
New York University
Sudipto Bhattacharya
London School of Economics
Prof. Jan Pieter Krahnen
Goethe University
Marcel Tyrell
Goethe University
Andrea L. Eisfeldt
Northwestern University
Xavier Freixas
Universitat Pompeu Fabra
Cornelia Holthausen
European Central Bank
Bengt Holmstrom
Massachusetts Institute of Technology
Jean Tirole
Toulouse School of Economics
Gary Gorton
Yale University
Lixin Huang
Georgia State University
Mark J. Flannery
University of Florida
Rafael Repullo
The Center for Monetary and Financial Studies
Jean-Charles Rochet
Toulouse School of Economics
Xavier Vives
IESE Business School, University of Navarra
Giovanni Dell'Ariccia
International Monetary Fund
Robert Marquez
Boston University
Doug Diamond
University of Chicago
Raghuram Rajan
University of Chicago
Nobuhiro Kiyotaki
Princeton University
John Moore
The University of Edinburgh
Juan Carlos Cordoba
Rice University
Marla Ripoll
University of Pittsburgh
Guido Lorenzoni
Massachusetts Institute of Technology
Amil Dasgupta
London School of Economics
Christian Upper
Deutsche Bundesbank
Andreas Worms
Deutsche Bundesbank
Dr Philipp Hartmann
European Central Bank
Dr. Stefan Straetmans
Maastricht University
Casper G. de Vries
Erasmus University Rotterdam
Itay Goldstein
University of Pennsylvania
Arvind Krishnamurthy
Northwestern University
Ricardo Caballero
Massachusetts Institute of Technology

Liquidity and Crises

Edited by Franklin Allen, Elena Carletti, Jan Pieter Krahnen, and Marcel Tyrell

Reviews and Awards

"Highly recommended." - THES Textbook Guide

"I would recommend this book especially to academics, but also to practitioners who want to deepen their knowledge in this important field of research." - Alexander Kohler, Financial Markets and Portfolio Management