Market failures in market-based finance

Arbeitspapier

We build a three-period model to investigate market failures in the market-based financial system. Institutional investors (IIs), such as insurance companies and pension funds, have liabilities offering guaranteed returns and operate under a risk-sensitive solvency constraint. They seek to allocate funds to asset managers (AMs) that provide diversification when investing in risky assets. At the interim date, AMs that run investment funds face investor redemptions and liquidate risky assets and/or deplete cash holdings, if available. Dealer banks can purchase risky assets, thus providing market liquidity. The latter ultimately determines equilibrium allocations. In the competitive equilibrium, AMs suffer from a pecuniary externality and hold inefficiently low amounts of cash. Asset fire sales increase the overall cost of meeting redemptions and depress risk-adjusted returns delivered by AMs to IIs, forcing the latter to de-risk. We show that a macroprudential approach to (i) the liquidity regulation of AMs and (ii) the solvency regulation of IIs can improve upon the competitive equilibrium allocations.

Angaben zum Objekt

• ISBN: 978-92-899-4545-5
• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: ECB Working Paper ; No. 2545

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Externalities ; Financial Crises ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors ; Corporate Finance and Governance: Government Policy and Regulation
• Thema: Market-based finance ; regulation ; investment funds ; insurance companies and pension funds ; market liquidity

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Di Iasio, Giovanni ; Kryczka, Dominika
• Ereignis: Veröffentlichung
• (wer): European Central Bank (ECB)
• (wo): Frankfurt a. M.
• (wann): 2021

Weitere Informationen

• DOI: doi:10.2866/21889
• Handle: http://hdl.handle.net/10419/234099
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ