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Endogenous leverage and asset pricing in double auctions

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  • Breuer, Thomas
  • Jandačka, Martin
  • Summer, Martin
  • Vollbrecht, Hans-Joachim

Abstract

We propose a double auction mechanism for the exchange of leveraged assets and bonds in an agent based model. In this framework we validate recent results in general equilibrium theory about endogenous leverage and its consequences for asset pricing. We find that the institutional details of exchange are critical for a good match between the theoretical equilibrium state and the final state of the double auction: Specifically, the outcome of the double auction is sensitive to the details of how markets for debt and collateral are coordinated and how collateral is cleared. When trade is restricted to neighbours in a network, final prices and allocations are significantly different from unrestricted equilibrium.

Suggested Citation

  • Breuer, Thomas & Jandačka, Martin & Summer, Martin & Vollbrecht, Hans-Joachim, 2015. "Endogenous leverage and asset pricing in double auctions," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 144-160.
    • Handle: RePEc:eee:dyncon:v:53:y:2015:i:c:p:144-160
    DOI: 10.1016/j.jedc.2015.02.004
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    More about this item

    Keywords

    Leverage; Asset pricing; Double auction; Agent based modeling; Trade on networks;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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