Rollover Risk, Liquidity, and Macro-Prudential Regulation

48 Pages Posted: 3 Jul 2014

See all articles by Toni Ahnert

Toni Ahnert

European Central Bank, Financial Research Division; Centre for Economic Policy Research (CEPR)

Date Written: March 31, 2014

Abstract

I study rollover risk in the wholesale funding market when intermediaries can hold liquidity ex-ante and are subject to fire sales ex-post. I demonstrate that precautionary liquidity restores multiple equilibria in a global rollover game. An intermediate liquidity level supports both the usual run equilibrium and an efficient equilibrium. I provide a uniqueness refinement to characterize the privately optimal liquidity choice. Because of fire sales, liquidity holdings are strategic substitutes. Intermediaries free-ride on the liquidity of other intermediaries, causing excessive liquidation. A macro-prudential authority internalizes the systemic nature of liquidity and restores constrained efficiency by imposing a macro-prudential liquidity buffer.

Keywords: global games, multiplicity, portfolio choice, wholesale funding

JEL Classification: G01, G11, G28

Suggested Citation

Ahnert, Toni, Rollover Risk, Liquidity, and Macro-Prudential Regulation (March 31, 2014). ECB Working Paper No. 1667, Available at SSRN: https://ssrn.com/abstract=2418234 or http://dx.doi.org/10.2139/ssrn.2418234

Toni Ahnert (Contact Author)

European Central Bank, Financial Research Division ( email )

ECB Tower
Sonnemannstraße 20
Frankfurt am Main

HOME PAGE: http://toniahnert.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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