Collateral Risk, Information Sensitivity, and Default Frictions on Collateralized Debt

46 Pages Posted: 31 Jan 2019 Last revised: 27 Jul 2023

See all articles by Kee-Youn Kang

Kee-Youn Kang

University of Liverpool Management School

Inkee Jang

Hanyang University - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 24, 2019

Abstract

We develop a theory of collateralized debt that emphasizes collateral risk, incentives to acquire information about collateral, and opportunistic default to study the determinants of the loan size, interest rates, and haircuts. The model predicts that safe assets are traded without haircuts and that risky collateral tends to be associated with higher interest rates and haircuts and with a smaller loan size. When both interest rates and haircuts exist, there is a substitution effect between interest rates and haircuts, keeping all other factors constant. The model also provides new perspectives on the effects of an increase in collateral risk.

Keywords: collateralized debt, collateral risk, costly information acquisition, opportunistic default, repos

JEL Classification: D53, D8, E44, G23

Suggested Citation

Kang, Kee-Youn and Jang, Inkee, Collateral Risk, Information Sensitivity, and Default Frictions on Collateralized Debt (January 24, 2019). Available at SSRN: https://ssrn.com/abstract=3321577 or http://dx.doi.org/10.2139/ssrn.3321577

Kee-Youn Kang (Contact Author)

University of Liverpool Management School ( email )

Inkee Jang

Hanyang University - School of Business ( email )

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