FRIC Lunch Seminar with Co-Pierre Georg, University of Cape Town and Deutsche Bundesbank

FRIC Center for Financial Frictions and the Department of Finance are pleased to announce the upcoming FRIC Lunch Seminar with Co-Pierre Georg, University of Cape Town and Deutsche Bundesbank.

Title: Illiquidity Spirals in Coupled Over-the-Counter Markets

Abstract:

Traders  provide  intermediation  of  two  related  financial  assets - secured  debt  and  the underlying  collateral. Each  asset  is  traded  in  its  own  over-the-counter  trading  network. Traders decide whether or not to be active in each network. We give conditions under which the financial connections between the  two  assets make  this  a  game  of strategic complements on two coupled networks:  incentives to be active in a given network are increasing both in neighbors’ activity choices in that network and in one’s own activity in the other network. Providing  the  first  analysis  of  such  network  games,  we  use  the  theory  of  fixed points  of  monotone  functions  to  characterize  the  general  structure  of  equilibria  in  such systems. We focus on illiquidity spirals:  following an exogenous shock disabling some intermediaries, a sequence of withdrawals occurs, corresponding to a contagion across the two networks. For  a class of market structures associated with random graphs,  liquidity changes discontinuously in the size of an exogenous shock, in contrast to standard models of network contagion.

Keywords: market liquidity, funding liquidity, over-the-counter markets

Location
Solbjerg Plads 3, 2000 Frederiksberg
Room: Augustinus Senate Meeting Room