Publication Date
Financial Markets Group Discussion Papers DP 586
Complex interactions between fundamentals and liquidity during unstable periods in financial markets are succinctly modeled with co-ordination games. We propose a flexible framework to estimate such a model and use the efficient method of moments as estimation proce- dure. We illustrate the model by using exchange rates from the yen–dollar carry trade induced uncertainty in 1998, interest rate spreads and global market volatility. The model fits the data well, with evidence of low information disparities, the market is generally very deep, where global volatility is more important than fundamental uncertainty in the determination of liquidity. There is clear evidence of asymmetry between the buy and sell sides of the market.
