Endogenous leverage and asset pricing in double auctions

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.