The Collateralizability Premium
88 Pages Posted: 25 Oct 2019
Date Written: October 09, 2019
A common prediction of macroeconomic models of credit market frictions is that the tightness of financial constraints is countercyclical. As a result, theory implies a negative collateralizability premium; that is, capital that can be used as collateral to relax financial constraints provides insurance against aggregate shocks and commands a lower risk compensation compared with non-collateralizable assets. We show that a longshort portfolio constructed using a novel measure of asset collateralizability generates an average excess return of around 8% per year. We develop a general equilibrium model with heterogeneous firms and financial constraints to quantitatively account for the collateralizability premium.
Keywords: Cross-Section of Returns, Financial Frictions, Collateral Constraint
JEL Classification: E2, E3, G12
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