Collateral Requirements and Asset Prices
Karlsruhe Institute of Technology
European Central Bank (ECB)
University of Zurich; Swiss Finance Institute
University of Zurich
December 16, 2013
Swiss Finance Institute Research Paper No. 11-10
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.
Number of Pages in PDF File: 35
Keywords: Bubbles, collateral constraints, collateral premium, endogenous margins.
JEL Classification: D53, G11, G12.
Date posted: March 27, 2011 ; Last revised: January 13, 2014