FRIC Research Seminar with Marie Hoerova, European Central Bank
FRIC Center for Financial Frictions and the Department of Finance are proud to announce the upcoming seminar with Marie Hoerova, European Central Bank.
Marie Hoerova will present: Optimal margins and equilibrium prices
We study the interaction between contracting and equilibrium pricing when risk-averse hedgers purchase insurance from risk-neutral investors subject to moral hazard. Moral hazard limits risk-sharing. In the individually optimal contract, margins are called (after bad news) to improve risk-sharing. But margin calls depress the price of investors' assets, affecting other investors negatively. Because of this fire-sale externality, there is too much use of margins in the market equilibrium compared to the utilitarian optimum. Moreover, equilibrium multiplicity can arise: In a pessimistic equilibrium, hedgers who fear low prices request high margins to obtain more insurance. Large margin calls trigger large price drops, confirming initial pessimistic expectations. Finally, moral hazard generates endogenous market incompleteness, raises risk premia, and induces contagion between asset classes.
Paper can be found here: Optimal margins and equilibrium prices
Solbjerg Plads 3, 2000 Frederiksberg
Room: SP D4.20