The Collateralizability Premium

88 Pages Posted: 25 Oct 2019

See all articles by Hengjie Ai

Hengjie Ai

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

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management

Christian Schlag

Goethe University Frankfurt - Research Center 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 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 - 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

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management ( email )

Clear Water Bay
Kowloon
Hong Kong

Christian Schlag (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

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

Register to save articles to
your library

Register

Paper statistics

Downloads
24
Abstract Views
181
PlumX Metrics