Search Results
Working Paper
Inducing agents to report hidden trades: a theory of an intermediary
When contracts are unobserved, agents may have the incentive to promise the same asset to multiple counterparties and subsequently default. The author constructs an optimal mechanism that induces agents to reveal all their trades voluntarily. The mechanism allows agents to report every contract they enter, and it makes public the names of agents who have reached some prespecified position limit. In some cases, an agent's position limit must be higher than the number of contracts he enters in equilibrium. The mechanism has some features of a clearinghouse. ; Supersedes Working Paper 09-10
Journal Article
Using collateral to secure loans
In ?Using Collateral to Secure Loans,? Yaron Leitner asks: Why is collateral used to secure some loans, but not others? And why does collateral potentially involve more risk? He considers these questions, looking at some of the explanations for using collateral, focusing on its benefits and drawbacks.
Working Paper
Market run-ups, market freezes, and leverage
The authors study trade between a buyer and a seller when both may have existing inventories of assets similar to those being traded. They analyze how these inventories affect trade, information dissemination, and price formation. The authors show that when the buyer's and seller's initial leverage is moderate, inventories increase price and trade volume, but when leverage is high, trade may become impossible (a "market freeze"). Their analysis predicts a pattern of trade in which prices and trade volume first increase, and then markets break down. The authors use their model to discuss ...
Journal Article
Legal uncertainty and contractual innovation
Although innovative contracts are important for economic growth, when firms face uncertainty as to whether contracts will be enforced, they may choose not to innovate. Legal uncertainty can arise if a judge interprets the terms of a contract in a way that is antithetical to the intentions of the parties to the contract. Or sometimes a judge may understand the contract but overrule it for other reasons. How does legal uncertainty affect firms? decisions to innovate? In ?Legal Uncertainty and Contractual Innovation,? Yaron Leitner explores issues related to legal uncertainty, particularly the ...
Working Paper
Market run-ups, market freezes, inventories, and leverage
This paper is superseded by Working Paper No. 13-14.> We study trade between a buyer and a seller who have existing inventories of assets similar to those being traded. We analyze how these inventories affect trade, information dissemination, and prices. We show that when traders? initial leverages are moderate, inventories increase price and trade volume (a market ?run-up?), but when leverages are high, trade is impossible (a market ?freeze?). Our analysis predicts a pattern of trade in which prices and volumes first increase, and then markets break down. Moreover, the presence of competing ...
Working Paper
Courts and contractual innovation: a preliminary analysis
The authors explore a model in which agents enter into a contract but are uncertain about how a judge will enforce it. The judge can consider a wide range of evidence, or instead, use a rule-based method of judgment that relies on limited information. The authors focus on the following tradeoff: Considering a wide range of evidence increases the likelihood of a correct ruling in the case at hand but undermines the formation of precedents that resolve legal uncertainty for subsequent agents. ; In a model of contractual innovation, they show that the use of evidence increases the likelihood of ...
Working Paper
A theory of an intermediary with nonexclusive contracting
This paper addresses large markets where agents cannot commit to sign exclusive contracts may induce agents to promise the same asset to multiple counterparties and subsequently default. Is how that in such markets an intermediary can increase welfare by simply setting limits on the number of contracts that agents can report to it voluntarily. In some cases, these limits must be nonbinding in equilibrium, and reported trades must not be made public. The theory shows why an exchange may be valuable even when markets are liquid. It also suggests why in some cases a regulator should not reveal ...
Working Paper
Stress tests and information disclosure
Superseded by Working Paper 15-10. We study an optimal disclosure policy of a regulator who has information about banks? ability to overcome future liquidity shocks. We focus on the following trade-off: Disclosing some information may be necessary to prevent a market breakdown, but disclosing too much information destroys risk-sharing opportunities (Hirshleifer effect). We find that during normal times, no disclosure is optimal, but during bad times, partial disclosure is optimal. We characterize the optimal form of this partial disclosure. We also relate our results to the debate on the ...
Journal Article
Why do markets freeze?
In normal times, investors buy and sell financial assets because there are gains from trade. However, markets do not always function properly ? they sometimes ?freeze.? An example is the collapse of trading in mortgage-backed securities during the recent financial crisis. Why does trade break down despite the potential gains from trade? Can the government intervene to restore the normal functioning of markets? In ?Why Do Markets Freeze?,? Yaron Leitner explains what a market freeze is and some of the theories as to why these freezes occur.
Working Paper
Financial networks: contagion, commitment, and private sector bailouts
The author develops a model of financial networks where linkages not only spread contagion, but also induce private-sector bailouts in which liquid banks bail out illiquid banks because of the threat of contagion. Introducing this bailout possibility, the author shows that linkages may be optimal ex-ante because they allow banks to obtain some mutual insurance even though formal commitments are impossible. However, in some cases (for example, when liquidity is concentrated among a small group of banks), the whole network may collapse. The author also characterizes the optimal network size and ...