Liquidating illiquid collateral

Oehmke, Martin ORCID: 0000-0001-9902-0711 (2014) Liquidating illiquid collateral. Journal of Economic Theory, 149. pp. 183-210. ISSN 1095-7235

Preview

Text - Accepted Version Download (768kB) | Preview

Abstract

Defaults of financial institutions can cause large, disorderly liquidations of repo collateral. This paper analyzes the dynamics of such liquidations. The model shows that (i) the equilibrium price of the collateral asset can overshoot; (ii) the creditor structure in repo lending involves a fundamental trade-off between risk sharing and inefficient “rushing for the exits” by competing sellers of collateral; (iii) repo lenders should take into account creditor structure, strategic interaction, and their own balance sheet constraints when setting margins; and (iv) the model provides a framework to analyze transfers of repo collateral to “deep-pocket” buyers or a repo resolution authority.

Item Type:	Article
Official URL:	http://www.sciencedirect.com/science/journal/00220...
Additional Information:	© 2013 Elsevier Inc.
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
Date Deposited:	10 Oct 2017 07:48
Last Modified:	12 Dec 2024 00:47
URI:	http://eprints.lse.ac.uk/id/eprint/84518

Actions (login required)

View Item