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.