collateral to support arbitrage trades. We show that with volatile asset demands, arbitrage becomes risky. With information … frictions, a looser collateral policy might render the economy more vulnerable to extremely large demand shocks, while a tighter … collateral constraint helps maintain the stability at the cost of market liquidity supply …

the collateral does not yield utility (for example, when it is a productive asset or a security). Equilibrium exists also … under more severe penalties and collateral utility gains, when the promise or the collateral are nominal assets and the …