Endogenous Leverage and Asset Pricing in Double Auctions

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Description:	Summer, M (Oesterreichische Nationalbank) Monday 15 December 2014, 11:00-11:45


Created:	2014-12-19 12:57
Collection:	Systemic Risk: Mathematical Modelling and Interdisciplinary Approaches
Publisher:	Isaac Newton Institute
Copyright:	Summer, M
Language:	eng (English)


Abstract:	Co-authors: Thomas Breuer (University of Applied Sciences, Vorarlberg), Hans-Joachim Vollbrecht (University of Applied Sciences, Vorarlberg), Martin Jandacka (University of Applied Sciences, Vorarlberg) We study the exchange and pricing of leveraged assets in an agent based model of a continuous double auction. In this framework we validate recent results in general equilibrium theory about endogenous leverage and its consequences for asset pricing. We find that the institutional details of exchange are critical for a good match between the predictions of the theory and the outcome of the double auction. The outcome of the double auction is in particular sensitive with respect to the details of how markets for debt and collateral are coordinated and how collateral is cleared. These results delineate the scope of markets and financial instruments for which the equilibrium theory provides an appropriate perspective.

Abstract:

Co-authors: Thomas Breuer (University of Applied Sciences, Vorarlberg), Hans-Joachim Vollbrecht (University of Applied Sciences, Vorarlberg), Martin Jandacka (University of Applied Sciences, Vorarlberg)

We study the exchange and pricing of leveraged assets in an agent based model of a continuous double auction. In this framework we validate recent results in general equilibrium theory about endogenous leverage and its consequences for asset pricing. We find that the institutional details of exchange are critical for a good match between the predictions of the theory and the outcome of the double auction. The outcome of the double auction is in particular sensitive with respect to the details of how markets for debt and collateral are coordinated and how collateral is cleared. These results delineate the scope of markets and financial instruments for which the equilibrium theory provides an appropriate perspective.

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