Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/154100 
Authors: 
Year of Publication: 
2014
Series/Report no.: 
ECB Working Paper No. 1667
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
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.
Subjects: 
global games
multiplicity
portfolio choice
wholesale funding
JEL: 
G01
G11
G28
Document Type: 
Working Paper

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