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'Self-fulfilling Fire Sales: Fragility of Collateralised Short-term Debt Markets'

Detail Summary
Date 29 September 2015
Time 14:00 - 15:30
Location Roeterseilandcampus - gebouw E


This paper shows that collateralised short-term debt, although privately optimal for reducing borrowers’ moral hazard, can cause fragility (multiple equilibria) when the collateral market is illiquid. A new form of coordination failure between borrowers’ ex ante margin and risk-taking decisions engenders a systemic run in the collateralised debt market: large changes in credit rationing, margins, repo spreads, etc. The model also captures the large (small) cross-sectional differences between safe and risky collateral in bad (good) times. Finally, I show that asset price guarantees could improve welfare and promote stability but repealing repo contracts’ “automatic stay” exemption might do the opposite.


REC E0.22 (Conference Room A).

Roeterseilandcampus - gebouw E
Roeterseilandcampus - gebouw E

Roetersstraat 11
1018 WB Amsterdam