Collateral Constraints and Asset Prices

69 Pages Posted: 14 Nov 2015 Last revised: 29 Jul 2019

See all articles by Georgy Chabakauri

Georgy Chabakauri

London School of Economics and Political Science

Brandon Yueyang Han

London School of Economics and Political Science

Date Written: July 2019

Abstract

We study the effects of collateral constraints in an economy populated by investors with non-pledgeable labor incomes and heterogeneous preferences and beliefs. We show that these constraints inflate stock prices, generate spikes and crashes in price-dividend ratios and volatilities, clustering of volatilities, and leverage cycles. They also lead to substantial decreases in interest rates and increases in Sharpe ratios when investors are anxious about hitting constraints due to production crises in the economy. Furthermore, stock prices have large collateral premia over non-pledgeable incomes. We derive asset prices and stationary distributions of the investors’ consumption shares in closed form.

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 Constraints and Asset Prices (July 2019). AFFI/EUROFIDAI, 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 and Political Science ( email )

Houghton Street
LONDON, WC2A 2AE
United Kingdom

HOME PAGE: http://sites.google.com/view/brandonhan

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