Understanding Financial Crises

By Franklin Allen; Douglas Gale | Go to book overview

4
Asset markets

In the last chapter, we examined the role of intermediaries as providers of liquidity and risk sharing. We did so under the assumption that intermediaries operated in isolation. There were no other financial institutions and no financial markets. In the present chapter, by contrast, we restrict our attention to asset markets and assume that there are no financial institutions. In the chapters that follow, we use the building blocks developed in these two chapters to study economies in which financial intermediaries and financial markets coexist and interact with each other. Financial markets allow intermediaries to hedge risks and to obtain liquidity by selling assets, but this can be a mixed blessing. In some contexts, markets allow intermediaries to achieve superior risk sharing, but in others they lead to increased instability. To understand how markets can destabilize financial intermediaries, we first need to understand the relationship between market liquidity and asset-price volatility. This is an interesting topic in its own right. Its implications for the stability of the financial system will become clear in the next chapter.


4.1 MARKET PARTICIPATION

One of the most striking things about stock markets is the degree of price volatility. On any given day it is common for the largest movement of an individual stock to be around 25 percent. The total market often moves by one or two percent. In October 1987 the market fell by around a third in a single day. These large changes in prices can trigger financial instability. This is particularly true in modern financial systems where many institutions undertake complex risk management programs. Understanding asset price volatility is thus an important component of understanding financial crises. In this chapter we focus on asset markets alone. In the next chapter we will look at the interaction of markets and financial institutions and see how the effects investigated here can lead to fragility.

-99-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited page

Bookmark this page
Understanding Financial Crises
Table of contents

Table of contents

  • Title Page iii
  • Preface v
  • Contents vii
  • 1: History and Institutions 1
  • 2: Time, Uncertainty, and Liquidity 27
  • 3: Intermediation and Crises 58
  • 4: Asset Markets 99
  • 5: Financial Fragility 126
  • 6: Intermediation and Markets 153
  • 7: Optimal Regulation 190
  • 8: Money and Prices 216
  • 9: Bubbles and Crises 235
  • 10: Contagion 260
  • Index 299
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
/ 303

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.