Eres : Digital Library : Works

Paper eres2011_116:
Liquidity Black Hole and Optimal Behavioral

id eres2011_116
authors Tira, Giovanni; Gabrieli, Tommaso; Marcato, Gianluca
year 2011
title Liquidity Black Hole and Optimal Behavioral
source 18th Annual European Real Estate Society Conference in Eindhoven, the Netherlands
summary In turmoil periods, market liquidity can experience sudden dry ups connected with a significant price movements. This unexpected changes in liquidity patterns, often driven by irrational investors’ behaviour,and it is normally defined as Liquidity Black Hole (LBH). So far relevant research in this area explored macro-market level rather than explaining micro-agent decisions. In this study we show - both theoretically and empirically - that the LBH effect at market micro-level is originated by agents’ decisions made at a mutual fund level. We present a model on the behaviour of investors as a function of expected market risks and returns. The causes of a LBH are analyzed and the model is also tested under real case scenario, i.e. UK Real Estate Mutual Fund industry. Price creation is modeled both endogenously and exogenously, and it shows that the relationship between fund flows and expected liquidity risk follows an exponential function. Finally, we demonstrate that areas of absolute LBH exist and cannot be hedged. In those areas neither the available ”cash-like cushion” nor the managerial skills of the market maker can avoid the ”economic failure” of a fund.
series ERES:conference
content file.pdf (1,259,820 bytes)
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session D6: Risk Management, Measuring Volatility
last changed 2014/10/21 21:51
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