Document de travail

Optimal margins and equilibrium prices

Bruno Biais, Florian Heider et Marie Hoerova

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

Référence

Bruno Biais, Florian Heider et Marie Hoerova, « Optimal margins and equilibrium prices », TSE Working Paper, n° 17-819, juin 2017.

Voir aussi

Publié dans

TSE Working Paper, n° 17-819, juin 2017