Endogenous leverage and asset pricing in double auctions

Authored by Thomas Breuer, Martin Jandacka, Martin Summer, Hans-Joachim Vollbrecht

Date Published: 2015

DOI: 10.1016/j.jedc.2015.02.004

Sponsors: No sponsors listed

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Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

We propose a double auction mechanism for the exchange of leveraged assets and bonds in an agent based model. In this framework we validate recent results in general equilibrium theory about endogenous leverage and its consequences for asset pricing. We find that the institutional details of exchange are critical for a good match between the theoretical equilibrium state and the final state of the double auction: Specifically, the outcome of the double auction is sensitive to the details of how markets for debt and collateral are coordinated and how collateral is cleared. When trade is restricted to neighbours in a network, final prices and allocations are significantly different from unrestricted equilibrium. (C) 2015 Elsevier B.V. All rights reserved.

Tags

Equilibria Incomplete markets