Adverse selection in a crisis: Bank of Canada paper
During an economic crisis, adverse selection, which results when buyers and sellers have asymmetric information, can lead to market freezes and liquidity hoarding, research published Monday by the Bank of Canada finds.
Koralai Kirabaeva, the paper's author, writes: "Even a small amount of adverse selection in the asset market can lead to fire-sale pricing and possibly to a market breakdown if it is accompanied by a flight-to-liquidity, a misassessment of systemic risk, or uncertainty about asset
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