Debt Financing in Asset Markets

47 Pages Posted: 31 Mar 2012

See all articles by Zhiguo He

Zhiguo He

University of Chicago - Finance

Wei Xiong

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

Date Written: March 2012

Abstract

We study rollover risk and collateral value in a dynamic asset pricing model with endogenous debt financing by extending the framework of Geanakoplos (2009) with a generic binomial tree and time-varying heterogeneous beliefs. Optimistic borrowers face rollover risk if the belief dispersion between the borrowers and the pessimistic lenders widens after interim bad news. We demonstrate the optimality of the maximum riskless short-term debt financing for optimistic borrowers even in the presence of the rollover risk. We also highlight the role of interim trading which, by allowing creditors to sell seized collateral to other optimists with saved cashes, boosts the asset's collateral value and equilibrium price.

Suggested Citation

He, Zhiguo and Xiong, Wei, Debt Financing in Asset Markets (March 2012). NBER Working Paper No. w17935, Available at SSRN: https://ssrn.com/abstract=2031923

Zhiguo He (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://www.zhiguohe.com

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
33
Abstract Views
541
PlumX Metrics