Mitigating Fire Sales with a Central Clearing Counterparty
50 Pages Posted: 11 Apr 2019 Last revised: 21 Feb 2023
Date Written: August 10, 2020
I argue that one rationale for central clearing counterparties (CCPs) is to mitigate inefficiencies associated with distressed asset sales. First, I build a simple model where asset sales give rise to multiple equilibria, and show that a contract resembling a CCP ensures coordination on the Pareto-dominating equilibrium. Second, I empirically study the first event in economic history during which a CCP successfully eliminated inefficient asset sales: the global wool crisis of 1900.
Keywords: fire sales, liquidity, central clearing, CCP
JEL Classification: G23, G10
Suggested Citation: Suggested Citation