Haircut Dynamics

42 Pages Posted: 15 Aug 2010 Last revised: 8 Oct 2012

See all articles by Jakub W. Jurek

Jakub W. Jurek

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Erik Stafford

Harvard Business School - Finance Unit

Multiple version iconThere are 2 versions of this paper

Date Written: July 30, 2010

Abstract

In collateralized lending markets haircuts are used to protect the lender from the risk of loss. An important cross-sectional determinant of haircuts is the systematic risk profile of the collateral, which describes the rate at which the collateral value is expected to decline in adverse market conditions (i.e. when aggregate conditions deteriorate and/or aggregate risk increases). Assets whose value is expected to decline rapidly are predicted to have procyclical and highly volatile haircuts in an efficient market. Our simple model produces comparative statics and time-series dynamics that are consistent with the empirical features of repo market data, including the dramatic change in financing terms for structured products during the credit crisis of 2007-2008.

Keywords: Repo, Collateral, Crashes, Financing, Securitized

JEL Classification: G1, G2

Suggested Citation

Jurek, Jakub W. and Stafford, Erik, Haircut Dynamics (July 30, 2010). Available at SSRN: https://ssrn.com/abstract=1658935 or http://dx.doi.org/10.2139/ssrn.1658935

Jakub W. Jurek (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1588 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Erik Stafford

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-8064 (Phone)
617-496-7357 (Fax)

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