Collateral Requirements and Asset Prices

35 Pages Posted: 27 Mar 2011 Last revised: 13 Jan 2014

Johannes Brumm

Karlsruhe Institute of Technology

Michael Grill

European Central Bank (ECB)

Felix Kubler

University of Zurich; Swiss Finance Institute

Karl Schmedders

University of Zurich

Multiple version iconThere are 3 versions of this paper

Date Written: December 16, 2013

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 investigate this collateral premium 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. Moreover, otherwise identical assets with different degrees of collateralizability exhibit substantially different return dynamics because their prices contain a sizable collateral premium that varies over time. This premium can be positive even for assets that never pay dividends.

Keywords: Bubbles, collateral constraints, collateral premium, endogenous margins.

JEL Classification: D53, G11, G12.

Suggested Citation

Brumm, Johannes and Grill, Michael and Kubler, Felix and Schmedders, Karl, Collateral Requirements and Asset Prices (December 16, 2013). Swiss Finance Institute Research Paper No. 11-10. Available at SSRN: https://ssrn.com/abstract=1792720 or http://dx.doi.org/10.2139/ssrn.1792720

Johannes Brumm

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Michael Grill

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Felix E. Kubler

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Karl Schmedders (Contact Author)

University of Zurich ( email )

Moussonstrasse 15
Zürich, CH-8044
Switzerland
+41 (0)44 634 3770 (Phone)

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