Equilibrium Debt Financing

44 Pages Posted: 19 Mar 2010 Last revised: 12 Mar 2012

Zhiguo He

University of Chicago - Booth School of Business, and NBER

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 30, 2010


Building on Geanakoplos (2009), we study an equilibrium model of an asset market with cash-constrained optimists using their asset positions as collateral to raise debt financing. By using a general binomial setting with time-varying belief dispersion between agents, we highlight an asset's marketability as an important determinant of its collateral value. This is because the availability of secondary market trading allows creditors to sell seized collateral to other optimists with saved cash, which, in turn, not only boosts creditors' initial valuation of the collateral but also motivates optimists to save cash. Our model also establishes the maximum riskless short-term debt as the only debt contract used in the equilibrium and a risk-neutral representation of the equilibrium asset price and prices of debt contracts collateralized by the asset.

Keywords: Marketability, Collateral value, Debt maturity

Suggested Citation

He, Zhiguo and Xiong, Wei, Equilibrium Debt Financing (December 30, 2010). AFA 2011 Denver Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1571985 or http://dx.doi.org/10.2139/ssrn.1571985

Zhiguo He (Contact Author)

University of Chicago - Booth School of Business, and NBER ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/zhiguo.he/pubs.html

Wei Xiong

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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