Download or read book Liquidity Crisis, Runs, and Security Design -- Lessons from the Collapse of the Auction Rate Securities Market written by Song Han and published by . This book was released on 2009 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: We use the recent collapse of the ARS market to study the fragility of financial innovations and systemic risks. We find strong evidence of investor runs and coordination failure among major broker-dealers in providing liquidity support. The two forces amplified each other dynamically, resulting in the market's collapse. The likelihood of auction failure and ARS reset rates depend significantly upon both the level of maximum auction rates and the rule used to calculate them. As predicted by auction theories, there is also strong evidence of underpricing after dealers withdrew their liquidity support. Finally, we find that liquidity in the non-auction secondary market may encourage aggressive bidding in the auctions, which leads to higher interest rates. All of these revealed that the design of ARS is flawed.