Mitigating Liquidity Black Holes in Financial Markets: A Game Theoretic and Macroprudential Approach

The John Gokongwei School of Management invites you to a Brown Bag Session on “Mitigating Liquidity Black Holes in Financial Markets: A Game Theoretic and Macroprudential Approach". Our presenter is Emmanuel Richard B. Madarang, Assistant Professor at the Department of Finance and Accounting.

This will be held on Wednesday, 01 October 2025 from 12:00 - 1:30PM at the Cabochan Room, SOM 307 and online via Zoom. Please register here: https://bit.ly/jgsombrownbag1oct2025

Brief Description of the Topic:

This paper reviews Morris and Shin’s (2004) “Liquidity Black Holes,” which models how interactions between risk-neutral, short-horizon traders (Type B) with privately known stop-loss limits and risk-averse market makers (Type A) can trigger self-reinforcing sell-offs akin to bank runs. The paper explains the unique equilibrium in which traders preemptively sell above their loss limits, worsening market illiquidity. It distinguishes endogenous from fundamental illiquidity and draws parallels to crises like the 2007–08 Global Financial Crisis. The author proposes coordinated macroprudential measures between the regulatory authorities and the regulated financial institutions—temporarily suspending stop-loss limits and introducing countercyclical “safe” assets—to mitigate such downward price spirals. These regulatory interventions aim to reduce forced selling, preserve market stability, and provide liquidity during stress, with reactivation of stop-loss regimes after recovery.

About the Speaker:

Emmanuel Richard “Manny” B. Madarang is a finance professor at the Ateneo de Manila University’s John Gokongwei School of Management and a second-year PhD student in Rural Development at the Central Luzon State University, with additional PhD units in Business Economics from the University of Asia and the Pacific. He holds master’s degrees in Finance and Industrial Economics, and a BS in Management, major in Legal Management (Honorable Mention) from Ateneo. With over two decades of experience, he has held senior advisory roles in finance, risk management, and economic research at major banks, consultancies, and multinational firms. A multilingual educator and consultant, he has taught finance, economics, and multiple languages, and advised on strategic business initiatives, specializing in macroeconomic analysis, public finance, business development, market risk modeling, and financial regulation.