Document de travail
Optimal margins and equilibrium prices
Bruno Biais, Florian Heider et Marie Hoerova
n° 875, juin 2017
Référence
Bruno Biais, Florian Heider et Marie Hoerova, « Optimal margins and equilibrium prices », IDEI Working Paper, n° 875, juin 2017.
Résumé
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.
Mots-clés
Insurance; Derivatives; Moral hazard; Risk-management; Margin requirements; Contagion; Fire-sales;
Codes JEL
- D82: Asymmetric and Private Information • Mechanism Design
- G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages
- G22: Insurance • Insurance Companies • Actuarial Studies
Partenaire de recherche
Fédération des Banques Françaises Research Initiative (sustainable)