Collateral Risk, Information Sensitivity, and Default Frictions on Collateralized Debt

36 Pages Posted: 10 Oct 2022

See all articles by Inkee Jang

Inkee Jang

Hanyang University - School of Business

Kee-Youn Kang

University of Liverpool Management School

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Abstract

We develop a theory of collateralized debt that emphasizes collateral risk, incentives to acquire information about collateral, and opportunistic default to study the determinants of the loan size, interest rates, and haircuts. The model predicts that safe assets are traded without haircuts and that risky collateral tends to be associated with higher interest rates and haircuts and with smaller loan sizes. When both interest rates and haircuts exist, there is a substitution effect between interest rates and haircuts, keeping all other factors constant. The model also provides new perspectives on the effects of an increase in collateral risk.

Keywords: Collateralized debt, Collateral risk, Costly information acquisition, Opportunistic default, Repos

Suggested Citation

Jang, Inkee and Kang, Kee-Youn, Collateral Risk, Information Sensitivity, and Default Frictions on Collateralized Debt. Available at SSRN: https://ssrn.com/abstract=4243948 or http://dx.doi.org/10.2139/ssrn.4243948

Inkee Jang

Hanyang University - School of Business ( email )

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Kee-Youn Kang (Contact Author)

University of Liverpool Management School ( email )

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