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What caused the decline in market liquidity

The Economic Times – The mavens continue to pore over figures and analyse the why, how and after-effects of bankruptcy of the major-league investment bank Lehman , on September 15 last year. It’s clear that financial innovation in the mature markets was way ahead of the curve vis-a-vis regulation and prudential norms in this decade, and especially in the run-up to the recent global financial crisis.

A recent working paper at the National Bureau of Economic Research in the US has looked into how ‘shocks to fundamentals’ that affect wealth, read capital, of key financial institutions can well set off a severe downward spiral.

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