Rollover risk, liquidity, and macro-prudential regulation

Toni Ahnert

No 1667, Working Paper Series from European Central Bank

Abstract: I study rollover risk in the wholesale funding market when intermediaries can hold liquidity ex-ante and are subject to fire sales ex-post. I demonstrate that precautionary liquidity restores multiple equilibria in a global rollover game. An intermediate liquidity level supports both the usual run equilibrium and an efficient equilibrium. I provide a uniqueness refinement to characterize the privately optimal liquidity choice. Because of fire sales, liquidity holdings are strategic substitutes. Intermediaries free-ride on the liquidity of other intermediaries, causing excessive liquidation. A macro-prudential authority internalizes the systemic nature of liquidity and restores constrained efficiency by imposing a macro-prudential liquidity buffer. JEL Classification: G01, G11, G28

Keywords: global games; multiplicity; portfolio choice; wholesale funding (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-ban
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Working Paper: Rollover Risk, Liquidity and Macroprudential Regulation (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20141667

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