Collateral Requirements and Asset Prices
41 Pages Posted: 21 Jun 2016
Date Written: 2013
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
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