The Collateralizability Premium

88 Pages Posted: 25 Oct 2019

See all articles by Hengjie Ai

Hengjie Ai

University of Minnesota - Carlson School of Management; University of Minnesota - Twin Cities - Carlson School of Management

Jun E. Li

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Kai Li

Peking University HSBC Business School

Christian Schlag

Goethe University Frankfurt; Leibniz Institute for Financial Research SAFE

Date Written: October 09, 2019

Abstract

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

Suggested Citation

Ai, Hengjie and Ai, Hengjie and Li, Jun and Li, Kai and Schlag, Christian, The Collateralizability Premium (October 09, 2019). SAFE Working Paper No. 264 (2019), Available at SSRN: https://ssrn.com/abstract=3474975 or http://dx.doi.org/10.2139/ssrn.3474975

Hengjie Ai

University of Minnesota - Carlson School of Management ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Jun Li

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Kai Li

Peking University HSBC Business School ( email )

+86 755 26032023 (Phone)

HOME PAGE: http://sites.google.com/site/kailiwebpage

Christian Schlag (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

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