Market Based, Segregated Exchanges With Default Risk
Source: Munich Personal Repec Archive
This paper studies a competitive general equilibrium model with default and endogenous collateral constraints. Even though all collateralized contracts are allowed, the possibility and desirability of trade in spot markets (or the equivalent trade in ex ante asset backed securities) creates externalities, as spot prices (or security prices) and the bindingness of collateral constraints interact. The authors show that if agents are allowed to contract ex ante on market fundamentals determining the state-contingent spot price, over and above contracting on true underlying states of the world, then competitive equilibria with bundled securities and commodities and with endogenous collateral constraints are equivalent with Pareto optima.