Collateral, default penalties and infinite horizon equilibrium

Pascoa and Seghir (2009) noticed that when collateralized promises become subject to utility penalties on default, Ponzi schemes may occur. However, equilibrium exists in some interesting cases. Under low penalties, equilibrium exists if the collateral does not yield utility (for example, when it is a productive asset or a security). Equilibrium exists also under more severe penalties and collateral utility gains, when the promise or the collateral are nominal assets and the margin requirements are endogenous: relative inflation rates and margin coefficients can make the income effects dominate the penalty effects. An equilibrium refinement avoids no-trade equilibria with unduly repayment beliefs. Our refinement differs from the one used by Dubey, Geanakoplos and Shubik (2005) as it does not eliminate no trade equilibria whose low delivery rates are consistent with the propensity to default of agents that are on the verge of selling.Nova Foru

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

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/

Blocking efficacy of Small Coalitions in Myopic Economies

We consider a continuum economy with infinitely many commodities and show that, for any positive var epsilon, the core of the economy coincides with the set of allocations which are not blocked by any coalition with measure less than var epsilon. Actually, our main result is an extension of Grodal's (1972, Econometrica40, 581–583) result and, therefore, Schmeidler's (1972, Econometrica40, 579–580) result to economies whose commodity space is ℓ∞, for myopic preferences.1 Supported by Research Grant PB95-0729-C02 from the Dirección General de Investigación Científica y Técnica (DGICYT), Spanish Ministry of Education. 2 Support from the Spanish Ministry of Education through a post doctoral fellowship in 1997 and from a Training and Mobility of Researchers (E.C.) fellowship in 1998 while visiting Universidade Nova de Lisboa, is acknowledged. 3 Support from the Portuguese Ministry of Science and Technology (project Praxis PCSHC- CEG9-96), is acknowledged.Publicad

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 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.

Fiat money and the value of binding portfolio constraints

We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for inter-temporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of inter-temporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience

Fiat money and the value of binding portfolio constraints

We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for inter-temporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of inter-temporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience

Fiat money and the value of binding portfolio constraints

We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for intertemporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of intertemporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience