Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/208225 
Year of Publication: 
2018
Series/Report no.: 
ECB Working Paper No. 2191
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
Protection buyers use derivatives to share risk with protection sellers, whose assets are only imperfectly pledgeable because of moral hazard. To mitigate moral hazard, privately optimal derivative contracts involve variation margins. When margins are called, protection sellers must liquidate some of their own assets. We analyse, in a general-equilibrium framework, whether this leads to inefficient fire sales. If investors buying in a fire sale interim can also trade ex ante with protection buyers, equilibrium is information-constrained efficient even though not all marginal rates of substitution are equalized. Otherwise, privately optimal margin calls are ineffciently high. To address this inefficiency, public policy should facilitate ex-ante contracting among all relevant counterparties.
Subjects: 
variation margins
fire sales
pecuniary externalities
constrained efficiency
macro-prudential regulation
JEL: 
G18
D62
G13
D82
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3296-7
Document Type: 
Working Paper

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