Re-use of collateral: Leverage, volatility, and welfare

Arbeitspapier

We assess the quantitative implications of collateral re-use on leverage, volatility, and welfare within an infinite-horizon asset-pricing model with heterogeneous agents. In our model, the ability of agents to reuse frees up collateral that can be used to back more transactions. Re-use thus contributes to the buildup of leverage and significantly increases volatility in financial markets. When introducing limits on re-use, we find that volatility is strictly decreasing as these limits become tighter, yet the impact on welfare is non-monotone. In the model, allowing for some re-use can improve welfare as it enables agents to share risk more effectively. Allowing re-use beyond intermediate levels, however, can lead to excessive leverage and lower welfare. So the analysis in this paper provides a rationale for limiting, yet not banning, re-use in financial markets.

Object Details

• ISBN: 978-92-899-3323-0
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2218

Classification and Topics

• Classification: Wirtschaft ; General Equilibrium and Disequilibrium: Financial Markets ; Financial Crises ; Asset Pricing; Trading Volume; Bond Interest Rates ; General Financial Markets: Government Policy and Regulation
• Subject: Heterogeneous agents ; leverage ; re-use of collateral ; volatility ; welfare

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Brumm, Johannes ; Grill, Michael ; Kubler, Felix ; Schmedders, Karl
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2018

Further information

• DOI: doi:10.2866/909036
• Handle: http://hdl.handle.net/10419/208252
• Last update: 10.03.2025, 11:44 AM CET