Traders’ inventories affect market liquidity
Inventories at loan originators and buyers can both increase or decrease the volume of trade, depending on the leverage of the trading parties, new research from the Philadelphia Federal Reserve posits.
The research analyses how buyers' and sellers' existing stocks of assets affect the volume and terms of trade. The research shows that as leverage increases from low to moderate to high levels, prices and the probability of trade first increase, and then markets break down completely.
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