@article{AdverseSelection:1574,
      recid = {1574},
      author = {Kirabaeva, Koralai},
      title = {Adverse Selection, Liquidity, and Market Breakdown},
      address = {2010},
      pages = {1 online resource (53 pages)},
      abstract = {This paper studies the interaction between adverse  selection, liquidity risk and beliefs about systemic risk  in determining market liquidity, asset prices and welfare.  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 values. The ability to trade based  on private information improves welfare if adverse  selection does not lead to a market breakdown. Informed  trading allows financial institutions to reduce  idiosyncratic risks, but it exacerbates their exposure to  systemic risk. Further, I show that in a market  equilibrium, financial institutions overinvest into risky  illiquid assets (relative to the constrained efficient  allocation), which creates systemic externalities. Also, I  explore possible policy responses and discuss their  effectiveness.},
      url = {http://www.oar-rao.bank-banque-canada.ca/record/1574},
      doi = {https://doi.org/10.34989/swp-2010-32},
}