Liquidating illiquid collateral

Martin Oehmke

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Defaults of financial institutions can cause large, disorderly liquidations of repo collateral. This paper analyzes the dynamics of such liquidations. The model shows that (i) the equilibrium price of the collateral asset can overshoot; (ii) the creditor structure in repo lending involves a fundamental trade-off between risk sharing and inefficient “rushing for the exits” by competing sellers of collateral; (iii) repo lenders should take into account creditor structure, strategic interaction, and their own balance sheet constraints when setting margins; and (iv) the model provides a framework to analyze transfers of repo collateral to “deep-pocket” buyers or a repo resolution authority.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2014-01-01
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Citations: View citations in EconPapers (10)

Published in Journal of Economic Theory, 1, January, 2014, 149, pp. 183-210. ISSN: 1095-7235

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:84518

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