Segregated Security Exchanges with Ex Ante Rights to Trade: A Market-Based Solution to Collateral-Constrained Externalities

This paper previously circulated under the title "Endogenous Valuation of Collateral and Ex Ante Trade in Market Fundamentals, 2007" and "Market Based Segregated Exchanges with Default Risk, 2009". We would like to thank Anmol Bhandari, Mikhail Golosov, Lars Hansen, Bengt Holmstrom, Edward S. Prescott, Thomas Sargent, Alp Simsek, Harald Uhlig, Randall Wright, Haoxiang Zhu, seminar participants at Boston FED, Richmond FED, MIT, UCSB, UTCC, 2008 SED conference, Bewley conference, and LAFE conference. Sartja Duangchaiyoosook provided excellent research assistance.Tee Kilenthong is grateful to financial support from David Marshall-Merrill Lynch Faculty Fellowship at UCSB. Robert Townsend is grateful to financial support from the Eunice Kennedy Shriver National Institute of Child Health and Human Development (NICHD) under grant R01 HD027638, NSF, the John Templeton Foundation, and the Consortium on Financial Systems and Poverty at the University of Chicago through a grant from the Bill & Melinda Gates Foundation. The findings and conclusions contained in the report are those of the author(s) and do not necessarily represent the views of the funders. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.