Endogeneous Liquidity and Risk-Taking in Financial Markets

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The objective of this Research Project is to develop a theoretical model of financial markets that accounts for the joint determination of financial institutions risk-taking behaviour and liquidity conditions in secondary asset markets. From a modelling perspective, the Research Project will build on a growing literature studying how information frictions in financial markets can lead to sudden and massive disruptions in liquidity supply. The model will provide new insights into the causes and consequences of liquidity shortages in wholesale funding markets, as well as provide a theoretical framework by which to evaluate the effectiveness of government-sponsored asset purchases seeking to increase liquidity supply.