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Rollover Risk, Liquidity and Macroprudential Regulation

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  • Toni Ahnert

Abstract

I study rollover risk in the wholesale funding market when intermediaries can hold liquidity ex ante and are subject to fire sales ex post. Precautionary liquidity restores multiple equilibria in a global rollover game. An intermediate liquidity level supports both the usual run equilibrium and an efficient equilibrium. I provide a uniqueness refinement to characterize the privately optimal liquidity choice. Because of fire sales, liquidity holdings are strategic substitutes. Intermediaries free ride on the liquidity of other intermediaries, causing excessive liquidation. A macroprudential authority internalizes the systemic nature of liquidity and restores constrained efficiency by imposing a macroprudential liquidity buffer.

Suggested Citation

  • Toni Ahnert, 2014. "Rollover Risk, Liquidity and Macroprudential Regulation," Staff Working Papers 14-23, Bank of Canada.
  • Handle: RePEc:bca:bocawp:14-23
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Aldasoro, Iñaki & Faia, Ester, 2016. "Systemic loops and liquidity regulation," Journal of Financial Stability, Elsevier, vol. 27(C), pages 1-16.
    2. repec:oup:rfinst:v:30:y:2017:i:6:p:2130-2178. is not listed on IDEAS
    3. Toni Ahnert & Co-Pierre Georg, 2017. "Information Contagion and Systemic Risk," Staff Working Papers 17-29, Bank of Canada.
    4. repec:eee:finsta:v:35:y:2018:i:c:p:159-171 is not listed on IDEAS
    5. Toni Ahnert & Ali Kakhbod, 2017. "Information Choice and Amplification of Financial Crises," Review of Financial Studies, Society for Financial Studies, vol. 30(6), pages 2130-2178.
    6. Toni Ahnert & Benjamin Nelson, 2016. "Opaque Assets and Rollover Risk," Staff Working Papers 16-17, Bank of Canada.

    More about this item

    Keywords

    Financial Institutions; Financial system regulation and policies;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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