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Working Paper
Collateral Reuse and Financial Stability
The isolated effects of collateral reuse on financial stability are ambiguous and understudied. While greater collateral reuse can guarantee more payments with fewer assets, it can also increase the exposure to potential drops in collateral price. To analyze these tradeoffs, we develop a financial network model with endogenous asset pricing, multiple equilibria, and equilibrium selection. We find that more collateral reuse decreases the likelihood of the worst equilibrium (crisis), with varying effects depending on the network structure. Therefore, collateral reuse can unambiguously improve ...
Working Paper
Contagion in Debt and Collateral Markets
This paper investigates contagion in financial networks through both debt and collateral markets. We find that the role of collateral is mitigating counterparty exposures and reducing contagion but has a phase transition property. Contagion can change dramatically depending on the amount of collateral relative to the debt exposures. When there is an abundance of collateral (leverage is low), then collateral can fully cover debt exposures, and the network structure does not matter. When there is an adequate amount of collateral (leverage is moderate), then collateral can mitigate counterparty ...
Working Paper
Tokenization: Overview and Financial Stability Implications
In this paper we outline tokenization, which is a new and rapidly growing financial innovation in crypto asset markets, and we discuss potential benefits and financial stability implications. Tokenization refers to the process of constructing digital representations (crypto tokens) for non-crypto assets (reference assets). As we discuss below, tokenizations create interconnections between the digital asset ecosystem and the traditional financial system. At sufficient scale, tokenized assets could transmit volatility from crypto asset markets to the markets for the crypto token's reference ...