International Review of Business, Trade, and Economics
Noise-Dominated Markets: Liquidity Risk Without Insolvency
Abstract
Darius Joseph Hanson
The Efficient Market Hypothesis relies fundamentally on the transmission of in¬formation. However, financial crises are characterized by the breakdown of this mech¬anism. This paper provides an empirical validation of the theoretical framework pro¬posed by Hanson (2025), which extends informational asymmetry into a continuous-time stochastic setting [1]. By modeling intrinsic firm value (Vt ) and credit constraints (λt ) as orthogonal stochastic processes, we analyze the “Liquidity-Solvency Decou-pling” observed during the 2008 collapse of Bear Stearns. We utilize ex-post perfor¬mance data from the Maiden Lane portfolio to demonstrate that the firm possessed substantial positive intrinsic value (Vt > 0) at the moment of its liquidation. We argue that the firm was forced into a strategic exit not by insolvency, but by a high-noise signal regime (η �?� 0) generated by opaque Level 3 assets. In this regime, standard managerial signaling became statistically ineffective against the stochastic drift of credit risk. These findings challenge the “bad bank” narrative and validate the neces¬sity of liquidity-focused regulations like the LCR.