Risky Arbitrage and Collateral Policies

Ally Zhang
Additional contact information
Ally Zhang: University of Zurich and Swiss Finance Institute

No 17-56, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We construct a dynamic model economy in which investors from segmented markets have varying financial asset demands. Intermediaries make arbitrage profits by exploiting the price spreads across markets. Meanwhile, they are required to separately post collateral to support arbitrage trades. We show that with volatile asset demands, arbitrage becomes risky. With information frictions, a looser collateral policy might render the economy more vulnerable to extremely large demand shocks, while a tighter collateral constraint helps maintain the stability at the cost of market liquidity supply.

Keywords: collateral; financial constraints; systemic risk; liquidity; financial stability; incomplete markets (search for similar items in EconPapers)
JEL-codes: C68 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2017-12
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2485099 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1756

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().