Does Additional Enforcement Mechanisms with Collateral Requirements Matter?

15 Pages Posted: 2 Dec 2012 Last revised: 4 Sep 2015

José Fajardo

Getulio Vargas Foundation

Date Written: November 3, 2014

Abstract

In this paper we show that additional enforcement mechanisms in economies with collateral requirements are effective, in the sense that agents can not anticipate payments exceeding the value of collateral requirement. To achieve this goal we show that the suitable arbitrage notion to be used, in stead of the classical pure arbitrage notion, must be the behavioral arbitrage opportunities (BAO) concept. More precisely, we prove that absence of BAO is compatible with the existence of solution of the individual optimization problem and with the existence of equilibrium.

Keywords: Default, Enforcement Mechanism, Bad Arbitrage, Uncertain deliveries

JEL Classification: D52, G12

Suggested Citation

Fajardo, José, Does Additional Enforcement Mechanisms with Collateral Requirements Matter? (November 3, 2014). Available at SSRN: https://ssrn.com/abstract=2183660 or http://dx.doi.org/10.2139/ssrn.2183660

José Fajardo (Contact Author)

Getulio Vargas Foundation ( email )

Brazil
55213799 5781 (Phone)

HOME PAGE: http://www.josefajardo.com

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