Collateral Requirements and Asset Prices

Abstract:     
Many assets derive their value not only from future cash flows but also from their ability to serve as collateral. In this paper, we systematically investigate this collateral value and its impact on asset returns in an infinite-horizon general equilibrium model with heterogeneous agents facing collateral constraints for borrowing. We document that borrowing against collateral substantially increases the return volatility of long-lived assets. In addition, we show that otherwise identical assets with different degrees of collateralizability exhibit substantially different return dynamics.

Number of Pages in PDF File: 38

Keywords: Collateral constraints, endogenous margins, heterogeneous agents

JEL Classification: D53, G11, G12

working papers series