UNIVERSITY OF PIRAEUS
The Department of Banking and Financial Management announces the upcoming seminar with
Dr. Florian Heider, European Central Bank
“Variation margins, fire sales, and information-constrained optimality”
Seminar Organizers: Assist. Prof. Michail Anthropelos, Prof. George Skiadopoulos
Abstract: In order to share risk, protection buyers trade derivatives with protection sellers. Protection sellers’ actions affect the riskiness of their assets and therefore counterparty risk. Because these actions are unobservable there is moral hazard, which hinders risk sharing. To mitigate this problem, privately optimal derivative contracts involve variation margins. When margins are called, protection sellers must liquidate some assets, depressing asset prices. This tightens the incentive constraints of other protection sellers, reducing their ability to provide insurance. Despite such externalities, equilibrium is information-constrained efficient because investors, who benefit from fire sales in which they buy underpriced assets, complement the insurance provided by protection sellers.
Florian Heider is Principal Economist in the Financial Research Division of the Directorate General Research at the European Central Bank. He has a PhD in Economics from the Catholic University of Louvain-la-Neuve (Belgium). Prior to joining the ECB, he worked as Research Fellow at the London School of Economics and as Visiting Assistant Professor of Finance at the Stern Business School of New York University. His work has appeared in the Journal of Finance, the Review of Financial Studies, the Journal of Financial Economics, and other peer-reviewed journals. More information could be found at https://www.ecb.europa.eu/pub/research/authors/profiles/florian-heider.en.html