The Collateralizability Premium

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