Collateral Requirements and Asset Prices

58 Pages Posted: 14 Nov 2015 Last revised: 17 Apr 2018

Georgy Chabakauri

London School of Economics and Political Science

Brandon Yueyang Han

London School of Economics & Political Science, Department of Finance

Date Written: April 4, 2018

Abstract

We consider an economy populated by investors with heterogeneous preferences and beliefs who receive non-pledgeable labor incomes. We study the effects of collateral constraints that require investors to maintain sufficient pledgeable capital to cover their liabilities. We show that these constraints inflate stock prices, give rise to clusters of stock return volatilities, and produce spikes and crashes in price-dividend ratios and volatilities. Furthermore, mere possibility of a crisis significantly decreases interest rates and increases Sharpe ratios. The stock price has large collateral premium over non-pledgeable incomes. Asset prices are in closed form, and investors survive in the long run.

Keywords: collateral, non-pledgeable labor income, heterogeneous preferences, disagreement, asset prices, stationary equilibrium

JEL Classification: D52, G12

Suggested Citation

Chabakauri, Georgy and Han, Brandon Yueyang, Collateral Requirements and Asset Prices (April 4, 2018). Paris December 2016 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2689672 or http://dx.doi.org/10.2139/ssrn.2689672

Georgy Chabakauri (Contact Author)

London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/CHABAKAU/

Brandon Yueyang Han

London School of Economics & Political Science, Department of Finance ( email )

London
Great Britain

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