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Rollover Risk, Liquidity and Macroprudential Regulation

  • Toni Ahnert

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.

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Paper provided by Bank of Canada in its series Staff Working Papers with number 14-23.

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Length: 50 pages
Date of creation: 2014
Date of revision:
Handle: RePEc:bca:bocawp:14-23
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