Trading and rational security pricing bubbles

Securities markets theory includes repo and distinguishes shorting from issuing. Here we revisit whether trading alone can give rise to Ponzi schemes and rational bubbles. We show that under the same institutional arrangements that limit re-hypothecation (e.g., through segregated haircut rules or explicit leverage constraints on haircut collecting dealers), (1) trading Ponzi schemes are prevented without having to assume uniform impatience, (2) for securities in positive net supply, bubbles are ruled out under complete markets but may occur when markets are incomplete. We give an example of such a bubble, under a finite present value of wealth.Repo, Short sale, Bubble, Repo specialness, Ponzi scheme, Leverage

The dollar squeeze of the financial crisis

By Covered Interest rate Parity (CIP), the FX swap implied currrency interest rates should coincide with actual interest rates. When a difference occurs, the residual is referred to as the cross currency basis. We link the Euro- Dollar currency basis (e.g. in 2008) to shadow prices of dollar funding constraints and interpret the basis as the relative physical possession value of the scarcer currency, or the “convenience yield” associated with that currency. This is similar to specialness in repo markets, expressing the physical possession value of a security. We examine how the coordinated central banks intervention can reduce the currency basis.FX swaps, Repo, Euro-Dollar currency basis, The 2008 dollar squeeze, Possession

Determinants of repo haircuts and bankruptcy

Variations in repo haircuts play a crucial role in leveraging (or deleveraging) in security markets, as observed in the two major economic events that happened so far in this century, the US housing bubble that burst into the great recession and the European sovereign debts episode. Repo trades are secured but recourse loans. Default triggers insolvency. Collateral may be temporarily exempt from automatic stay but creditors' final reimbursement depends on the bankruptcy outcome. We show examples of bankruptcy equilibria. We infer how haircuts are related to asset or counterparty risks whenever a bankruptcy equilibrium exists.N/

Trading and rational security pricing bubbles

URL des Documents de travail : https://centredeconomiesorbonne.univ-paris1.fr/document-de-travail-du-ces/Documents de travail du Centre d'Economie de la Sorbonne 2012.10 - ISSN : 1955-611XSecurities markets theory includes repo and distinguishes shorting from issuing. Here we revisit whether trading alone can give rise to Ponzi schemes and rational bubbles. We show that under the same institutional arrangements that limit re-hypothecation (e.g., through segregated haircut rules or explicit leverage constraints on haircut collecting dealers), (1) trading Ponzi schemes are prevented without having to assume uniform impatience, (2) for securities in positive net supply, bubbles are ruled out under complete markets but may occur when markets are incomplete. We give an example of such a bubble, under a finite present value of wealth.Toute théorie des titres doit inclure une théorie des pensions livrées. Sans elle, on ne peut comprendre la valeur de possession associée à la possession physique d'un titre. Sans pensions livrées, il y a confusion entre l'émission des titres et leur vente à découvert ; entre marchés primaire et secondaire. Notre théorie des pensions livrées nous permet une telle distinction. Nous examinons les chaînes de Ponzi et des bulles spéculatives au sein du marché secondaire uniquement. On imagine donc une situation somme toute d'un grand réalisme pratique : celle où le marché primaire est inaccessible. Nous le supposerons fermé. Nous montrons que les mêmes arrangements institutionnels qui limitent la rehypothécation limitent les chaînes de Ponzi au sein du marché secondaire mais semblent favoriser la présence de bulles spéculatives qui existent même pour les titres en quantité positive quand les marchés sont incomplets. L'ouverture libre du marché primaire élimineraient alors de telle bulles. Nous donnons un exemple d'existence de bulle spéculative secondaire alors même que la richesse initiale est limitée

Trading and rational security pricing bubbles

Securities markets theory includes repo and distinguishes shorting from issuing. Here we revisit whether trading alone can give rise to Ponzi schemes and rational bubbles. We show that under the same institutional arrangements that limit re-hypothecation (e.g., through segregated haircut rules or explicit leverage constraints on haircut collecting dealers), (1) trading Ponzi schemes are prevented without having to assume uniform impatience, (2) for securities in positive net supply, bubbles are ruled out under complete markets but may occur when markets are incomplete. We give an example of such a bubble, under a finite present value of wealth.Repo, short sale, bubble, repo specialness, Ponzi scheme, leverage, trading.

The dollar squeeze of the financial crisis

By Covered Interest rate Parity (CIP), the FX swap implied currrency interest rates should coincide with actual interest rates. When a difference occurs, the residual is referred to as the cross currency basis. We link the Euro- Dollar currency basis (e.g. in 2008) to shadow prices of dollar funding constraints and interpret the basis as the relative physical possession value of the scarcer currency, or the “convenience yield” associated with that currency. This is similar to specialness in repo markets, expressing the physical possession value of a security. We examine how the coordinated central banks intervention can reduce the currency basis

The Dollar Squeeze of the Financial Crisis

By Covered Interest rate Parity (CIP), the FX swap implied currency interest rates should coincide with actual interest rates. When a difference occurs, the residual is referred to as the cross currency basis. We link the Euro-Dollar currency basis (e.g. in 2008) to shadow prices of dollar funding constraints and interpret the basis as the relative physical possession value of the scarcer currency, or the "convenience yield" associated with that currency. This is similar to specialness in repro markets, expressing the physical possession value of a security. We examine how the coordinated central banks intervention can reduce the currency basis.FX swaps, repo, Euro-Dollar currency basis, the 2008 dollar squeeze, possession.

Smooth returns in a multiperiod economy with incomplete markets

SIGLEAvailable from Bibliothek des Instituts fuer Weltwirtschaft, ZBW, Duesternbrook Weg 120, D-24105 Kiel W 45 (495) / FIZ - Fachinformationszzentrum Karlsruhe / TIB - Technische InformationsbibliothekDEGerman

Incomplete markets: transverse financial structures

In a multiperiod economy with incomplete markets and assets with payoff depending on the price history (e.g., asset and derivatives), we show that in order to get endowment generic existence of an equilibrium it is not needed to alter settlement features such as when payments are made and when the asset is traded. This is non-trivial as each such characteristic introduces a non-generic subclass of financial instruments. We show essentially that expiry date payments are the only payments that one needs perturbing (if at all). For previous periods - the P&L discovery map - is the one relevant for wealth transfers. This map transfers wealth between one period and the next by associating to each portfolio next period potential profit and losses as a function of the revealed information at the node. All present values involved can in general - because of backward induction pricing structure - be appropriately controlled via expiry payoffs only. This enables us to extend two-period work and introduce Transverse Financial Structures for multiperiod economies, where one cannot identify the payoffs of financial instruments to the P&L discovery map (in other words we introduce some financial ingeneering for Transverse Financial Structures). We capitalize on that difference using unexploited "maturity payout degrees of freedom" and rolling back the uncertainty tree. As an application of this approach we prove a conjecture by Magill and Quinzii that commodity forward contracts lead to endowment generic existence of an equilibrium in a multiperiod set-up.Assets, Incomplete markets, Existence, Liquidity.