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Default and Collateral in Financial Markets

Objective

The main objective of this project is to research the economic implications of default and collateral in financial markets. It is motivated from the observation that much of the lending in modern economies is secured by some form of collateral and by the empirical fact that modern economies experience a substantial amount of default and bankruptcy. From a theoretical perspective, the research aims to explore new ways of modelling default and collateral and employ them to evaluate the impact of default and collateral on market outcomes. From a policy recommendation perspective, the research aims to develop models with testable implications that can be used by practitioners to discuss the consequences of a wide range of policies. In particular, to explore which kind of regulation procedures should be implemented in order to lower the risk of default and at the same time not to reduce too much risk-sharing. The agenda includes two research directions. The first research direction will focus on the implications of default and collateral in economies with bounded rational agents. Our aim is to understand how default and collateral affect market outcomes in environments where agents are allowed to have very divergent and therefore possibly incorrect beliefs about endogenous economic variables like future prices and delivery rates. The second research direction will focus on the implications of default and collateral in economies with an open ended horizon. Our aim is to investigate endogenous debt constraints that are compatible with equilibrium and simultaneously allow for as much risk sharing as possible.

Field of science

  • /social sciences/economics and business/business and management/commerce

Call for proposal

ERC-2009-StG
See other projects for this call

Funding Scheme

ERC-SG - ERC Starting Grant

Host institution

THE UNIVERSITY OF EXETER
Address
The Queen's Drive Northcote House
EX4 4QJ Exeter
United Kingdom
Activity type
Higher or Secondary Education Establishments
EU contribution
€ 156 538
Principal investigator
Ioannis Vailakis (Dr.)
Administrative Contact
Enda Clarke (Dr.)

Beneficiaries (1)

THE UNIVERSITY OF EXETER
United Kingdom
EU contribution
€ 156 538
Address
The Queen's Drive Northcote House
EX4 4QJ Exeter
Activity type
Higher or Secondary Education Establishments
Principal investigator
Ioannis Vailakis (Dr.)
Administrative Contact
Enda Clarke (Dr.)