ECB paper tackles liquidity ‘free-rider’ problem
Author finds the more liquidity is held the more incentive for free-riding
Financial intermediation suffers from a free-rider problem that leads to an inefficient supply of liquidity to the system, a working paper published yesterday by the European Central Bank has found.
In Rollover risk, liquidity and macro-prudential regulation, author Toni Ahnert develops a game theoretic framework allowing investors to choose an optimal portfolio of safe, liquid assets and risky, return-giving assets. Ahnert finds liquidity holdings are partial substitutes – the more liquidity a
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