Fragility of Safe Asset Markets
Abstract In March 2020, safe asset markets experienced surprising and unprecedented price crashes. We explain how strategic investor behavior can create such market fragility in a model with investors valuing safety, investors valuing liquidity, and constrained dealers. While safety investors and liquidity investors can form a symbiotic relationship with offsetting trades during times of stress, strategic interactions among liquidity investors harbor the potential for self-fulfilling fragility. When the market is fragile, standard flight-to-safety can have a destabilizing effect and trigger a “dash-for-cash” by liquidity investors. Well-designed policy interventions can reduce market fragility ex ante and restore orderly functioning ex post.
- DOI
- 10.1093/rfs/hhaf064
- Volume
- 39 (5)
- Pages
- 1310-1361
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref