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Biais, Bruno
, Heider, Florian and Hoerova, Marie
(2022)
Variation margins, fire-sales and information-constrained optimality.
TSE Working Paper, n. 22-1296, Toulouse
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Abstract
In order to share risk, protection buyers trade derivatives with protection sellers. Protection sellers’ actions affect the riskiness of their assets, which can create counter-party risk. Because these actions are unobservable, moral hazard limits risk sharing. To mitigate this problem, privately optimal derivative contracts involve variation mar-gins. When margins are called, protection sellers must liquidate some assets, depressing asset prices. This tightens the incentive constraints of other protection sellers and re-duces their ability to provide insurance. Despite this fire-sale externality, equilibrium is information-constrained efficient. Investors, who benefit from buying assets at fire-sale prices, optimally supply insurance against the risk of fire sales.
| Item Type: | Monograph (Working Paper) |
|---|---|
| Language: | English |
| Date: | January 2022 |
| Place of Publication: | Toulouse |
| Uncontrolled Keywords: | variation margins, fire sales, pecuniary externality, moral hazard, con-strained efficiency, regulation |
| JEL Classification: | D62 - Externalities D82 - Asymmetric and Private Information G13 - Contingent Pricing; Futures Pricing G18 - Government Policy and Regulation |
| Subjects: | B- ECONOMIE ET FINANCE |
| Divisions: | TSE-R (Toulouse) |
| Institution: | Université Toulouse 1 Capitole |
| Site: | UT1 |
| Date Deposited: | 31 Jan 2022 10:09 |
| Last Modified: | 31 Jan 2022 10:09 |
| OAI Identifier: | oai:tse-fr.eu:126554 |
| URI: | https://publications.ut-capitole.fr/id/eprint/44280 |
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