Veranstaltungen des DIW Berlin/
Events of DIW Berlin

11 May 2016

DIW Seminar on Macroeconomics and Econometrics Optimal Margins and Equilibrium Prices

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.

More Information
  • Florian Heider, European Central Bank

  • Time
    12:00 - 13:15
    Gustav-Schmoller-Raum DIW Berlin im Quartier 110 Room 3.3.002A Mohrenstraße 58 10117 Berlin
    at DIW Berlin
    Tel.: +49 30 89789 581
    Tel.: +49 30 89789 439