{"title":"Contagion in debt and collateral markets","authors":"","doi":"10.1016/j.jmoneco.2024.103600","DOIUrl":null,"url":null,"abstract":"<div><div>This paper investigates contagion in financial networks through collateralized debt and its effects on social welfare. Our model incorporates contagion through both counterparty debt exposures and endogenous collateral asset pricing. We find that collateral mitigates counterparty exposures and reduces social inefficiency when faced with negative shocks, but not always. We also show the importance of the interaction between the level of collateral and network structure as contagion can change dramatically depending on that interaction. The model also provides policy-relevant collateral-to-debt ratios (haircuts) to attain robust and fully insulated macroprudential states for any network and also the optimal collateral ratio to attain full insulation for a specific network.</div></div>","PeriodicalId":48407,"journal":{"name":"Journal of Monetary Economics","volume":"148 ","pages":"Article 103600"},"PeriodicalIF":4.3000,"publicationDate":"2024-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Monetary Economics","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S0304393224000539","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
This paper investigates contagion in financial networks through collateralized debt and its effects on social welfare. Our model incorporates contagion through both counterparty debt exposures and endogenous collateral asset pricing. We find that collateral mitigates counterparty exposures and reduces social inefficiency when faced with negative shocks, but not always. We also show the importance of the interaction between the level of collateral and network structure as contagion can change dramatically depending on that interaction. The model also provides policy-relevant collateral-to-debt ratios (haircuts) to attain robust and fully insulated macroprudential states for any network and also the optimal collateral ratio to attain full insulation for a specific network.
期刊介绍：
The profession has witnessed over the past twenty years a remarkable expansion of research activities bearing on problems in the broader field of monetary economics. The strong interest in monetary analysis has been increasingly matched in recent years by the growing attention to the working and structure of financial institutions. The role of various institutional arrangements, the consequences of specific changes in banking structure and the welfare aspects of structural policies have attracted an increasing interest in the profession. There has also been a growing attention to the operation of credit markets and to various aspects in the behavior of rates of return on assets. The Journal of Monetary Economics provides a specialized forum for the publication of this research.
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