Market Freezes

Chao Gu, Guido Menzio, Randall Wright, Yu Zhu

    Research output: Contribution to journalArticlepeer-review


    Market freezes are an interesting and theoretically challenging phenomenon —they are observed empirically, but cannot occur in standard models. This paper develops a formal theory of recurrent freezes emphasizing liquidity and self-fulfilling prophecies. While it is well understood how to get hot and cold spells, where prices and quantities fluctuate, we get asset market freezes and thaws where trade completely stops and starts. The simplest specification gets this using negative asset returns. Other specifications use information frictions or fixed costs. We also consider credit freezes, analyze the extent to which the decentralized nature of trade matters, and discuss policy implications.

    Original languageEnglish (US)
    JournalJournal of Money, Credit and Banking
    StateAccepted/In press - 2024


    • liquidity
    • market freezes
    • self-fulfilling prophecies

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics


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