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Home | Events Archive | Variation Margins, Fire Sales, and Information-Constrained Optimality

Variation Margins, Fire Sales, and Information-Constrained Optimality

  • Series
  • Speaker
    Florian Heider (European Central Bank)
  • Field
  • Location
    Tinbergen Institute, Room 1.60
  • Date and time

    September 18, 2019
    12:45 - 14:00

In order to share risk, protection buyers trade derivatives with protection sellers.
Protection sellers' actions a ect the riskiness of their assets and therefore counterparty
risk. Because these actions are unobservable there is moral hazard, which hinders risk
sharing. To mitigate this problem, privately optimal derivative contracts involve variation margins. When margins are called, protection sellers must liquidate some assets, depressing asset prices. This tightens the incentive constraints of other protection sellers, reducing their ability to provide insurance. Despite such externalities, equilibrium is information-constrained ecient as investors, who bene t from re sales in which they buy underpriced assets, optimally supply insurance against the risk of fire sales.

Joint with Bruno Biais (HEC), Marie Hoerova (ECB).