Liquidity, Runs, and Security Design: Lessons from the Collapse of the Auction Rate Municipal Bond Market
In this paper, we use the recent collapse of the ARS market as a case study on important issues regarding fragility of financial innovations and systemic risks. We find strong evidence of investor runs for liquidity, partly caused by a self-fulfilling panic. In addition, coordination failures triggered by an unexpected first mover led all major broker-dealers to simultaneously withdraw their liquidity support. We also find that the likelihood of auction failures and ARS reset rates depend significantly on both the rule and the level of maximum auction rates; that, as predicted by auction theories, there is also strong evidence for underpricing after dealers with- drew their liquidity supports; and that inter-auction secondary market liquidity may encourage aggressive bidding that increases the reset rates.
Auction auction rate securities municipal bond pricing liquidity crisis
Song Han Dan Li
Capital Market Section, Federal Reserve Board, Mail Stop 89, Washington, DC 20551 USA
国际会议
广州
英文
1-48
2009-07-07（万方平台首次上网日期，不代表论文的发表时间）