The Collateralizability Premium

88 Pages Posted: 25 Oct 2019

See all articles by Hengjie Ai

Hengjie Ai

University of Wisconsin-Madison

Jun E. Li

University of Warwick - Warwick Business School

Kai Li

Peking University HSBC Business School

Christian Schlag

Goethe University Frankfurt; Leibniz Institute for Financial Research SAFE

Multiple version iconThere are 2 versions of this paper

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 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 Wisconsin-Madison ( email )

975 University Avenue
Madison, WI 53706
United States
6088903881 (Phone)

HOME PAGE: http://www.hengjieai.com

Jun Li

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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

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