Intermediation and Asset Prices
Sunday, Jan. 5, 2020 10:15 AM - 12:15 PM (PDT)
- Chair: Kathy Yuan, London School of Economics
Financially Constrained Strategic Arbitrage
AbstractWe develop an equilibrium model of strategic trading under nancial constraints. Investors have access to a fundamentally riskless arbitrage opportunity, but may be forced to re-sell if their capital does not fully cover their losses. Investors internalize both their price impact and the effect of price movements on the constraints of all market participants, giving rise to a strategic motive for the less exposed investors to induce re-sales of more exposed ones. Ex ante, the presence of predatory risk leads to lower investment by all traders. We show the implications of strategic trading on price dynamics, returns characteristics, and leverage cross-section and dynamics.
Pitfalls of Central Clearing in the Presence of Systematic Risk
AbstractThrough the lens of market participants' objective to minimize counterparty risk, we investigate
central clearing in derivatives markets, and its interaction with systematic risk, portfolio directionality, and loss sharing. Previous studies suggest that central clearing always reduces counterparty risk for a suffciently large number of clearing members. We show that this is not the case - mostly because of loss sharing. Central clearing can increase counterparty risk, particularly during extreme market events, for traders with directional portfolios, and because CCPs mutualize default losses. Our results are consistent with the reluctance to clear derivative trades in the absence of a clearing obligation.
- G1 - General Financial Markets