Financial Innovation, Collateral Hedging and Macro-Prudential Policies
This paper features an economy with incomplete markets, collateralised lending and investors that hold heterogeneous beliefs about the states of the world. Financial innovation motivated by macroprudential policies, takes the form of collateral hedging, which enables collateral protection insurance (CPI) contracts together with existing investment in capital to back loans. The contribution of this paper is to characterize the effectiveness of two macro-prudential policies, namely higher collateral requirements on CPI or capital, towards mitigating default friction and maximizing social welfare. The degree of belief disagreement is an important factor determining the effectiveness of policy. When disagreement is extreme, then the policy via financial innovation is not effective, unless it is not costly, and macro-prudential interventions call for higher collateral requirements on capital; while under moderate levels of disagreement, increasing collateral requirements on capital is not effective, and policy interventions call for financial innovation
Year of publication: |
[2023]
|
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Authors: | Wei, Lingsi |
Publisher: |
[S.l.] : SSRN |
Subject: | Finanzprodukt | Financial product | Hedging | Kreditsicherung | Collateral | Unvollkommener Markt | Incomplete market | Theorie | Theory | Finanzmarkt | Financial market |
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