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  3. American Economic Review
  4. July 2026
  5. Market Opacity and Fragility: Why Liquidity Evaporates When It Is Most Needed

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Market Opacity and Fragility: Why Liquidity Evaporates When It Is Most Needed

  • Giovanni Cespa
  • Xavier Vives
American Economic Review
vol. 116, no. 7, July 2026
(pp. 2454–2503)
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Abstract

Lack of market transparency can impair the liquidity provision of nonstandard liquidity suppliers and make liquidity demand increasing in illiquidity. This can yield strategic complementarities and induce multiple equilibria. Then an initial dearth of liquidity may degenerate into a liquidity rout (as in a "flash crash"), and traders faced with the largest cost of trading are those trading more intensely at equilibrium. An increase in order flow transparency and/or in the mass of dealers who are in the market at all times has a positive impact on total welfare.

Citation

Cespa, Giovanni, and Xavier Vives. 2026. "Market Opacity and Fragility: Why Liquidity Evaporates When It Is Most Needed." American Economic Review 116 (7): 2454–2503. DOI: 10.1257/aer.20231613

Additional Materials

JEL Classification

  • G12 Asset Pricing; Trading Volume; Bond Interest Rates
  • G14 Information and Market Efficiency; Event Studies; Insider Trading
  • G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]