Collateral Requirements and Asset Prices

41 Pages Posted: 21 Jun 2016

See all articles by Johannes Brumm

Johannes Brumm

Karlsruhe Institute of Technology

Michael Grill

European Central Bank (ECB)

Felix Kubler

University of Zurich; Swiss Finance Institute

Karl Schmedders

University of Zurich

Multiple version iconThere are 3 versions of this paper

Date Written: 2013

Abstract

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 value 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.

Keywords: collateral constraints, collateral premium, endogenous margins, heterogeneous agents, leverage

JEL Classification: D53, G11, G12

Suggested Citation

Brumm, Johannes and Grill, Michael and Kubler, Felix E. and Schmedders, Karl, Collateral Requirements and Asset Prices (2013). Bundesbank Discussion Paper No. 44/2013. Available at SSRN: https://ssrn.com/abstract=2796937

Johannes Brumm (Contact Author)

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Michael Grill

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Felix E. Kubler

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Karl Schmedders

University of Zurich ( email )

Moussonstrasse 15
Zürich, CH-8044
Switzerland
+41 (0)44 634 3770 (Phone)

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