Liquidity Rules: Manage innovation or risk repeating history
New research from Arvind Krishnamurthy argues that the rapid adoption of financial innovations—in this case, subprime mortgage-backed securities—set the stage for crisis. His report with coauthor Ricardo J. Caballero found that when popular new financial instruments behave unexpectedly, investors flee the market. The liquidity supply tightens, making it hard for market participants to get the capital they need.
Content: Article | Authors: Arvind Krishnamurthy, Ricardo J. Caballero | Source: “Kellogg Insight” | Subjects: Economics, Finance