Collateral Constraints and Asset Prices
69 Pages Posted: 14 Nov 2015 Last revised: 29 Jul 2019
Date Written: July 2019
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
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