Essays on Financial Markets with Liquidity Frictions

Download or read book Essays on Financial Markets with Liquidity Frictions written by Martin Oehmke and published by . This book was released on 2009 with total page 268 pages. Available in PDF, EPUB and Kindle. Book excerpt: The third chapter, joint work with Markus Brunnermeier, examines predatory short selling of equity in financial institutions. We show that when the stock of a leverage-constrained financial institution is shorted aggressively, this can trigger liquidations of long-term investments at fire-sale prices. Predatory short selling can emerge in equilibrium when a financial institution is (i) close to its leverage constraint (the vulnerability region) or (ii) violates its leverage constraint even in the absence of short selling (the constrained region). The model provides a potential justification for temporary restrictions on short selling for vulnerable institutions.