Market Transparency and Fragility
CESifo, Munich, 2016
CESifo Working Paper No. 6279
![](https://cesifo.org/DocImg/cesifo1_wp6279.jpg?c=1689237084)
We show that dealers’ limited market participation, coupled with an informational friction resulting from lack of market transparency, can make liquidity demand upward sloping, inducing strategic complementarities: traders demand more liquidity when the market becomes less liquid, fostering market illiquidity. This can generate instability with an initial dearth of liquidity degenerating into a liquidity rout (as in a ash crash). In a fully transparent market, liquidity is increasing in the proportion of dealers continuously present in the market; however, in a less transparent market, liquidity can be U-shaped in this proportion and in the degree of transparency.
Monetary Policy and International Finance
Empirical and Theoretical Methods