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Working Paper

Market Run-Ups, Market Freezes, Inventories, and Leverage

Philip Bond &
Yaron Leitner

January 2014

WP 13-14/R - The authors study trade between an informed seller and an uninformed buyer who have existing inventories of assets similar to those being traded.

Supersedes Working Paper 12-08 - Market Run-Ups, Market Freezes, Inventories, and Leverage

They show that these inventories may induce the buyer to increase the price (a “run-up”) but may also make trade impossible (a “freeze”) and hamper information dissemination. Competition may amplify the run-up by inducing buyers to purchase assets at a loss to prevent competitors from purchasing at lower prices and releasing bad news about inventory values. In a dynamic extension, the authors show that a market freeze may be preceded by high prices. Finally, they discuss empirical and policy implications.

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