Credit, Collateral and Financial Arrangements
14 Pages Posted: 14 Jul 2005
Date Written: October 2004
Abstract
The existence of collateral requirements to the exchange of securities in general reduces the efficiency of competitive equilibria. The general equilibrium analysis is presented in a world where reputation plays no role, and the lender always expects a future payment equal to the minimum between the original promise and the future market value of provided collateral.
In this context, I show that collateral requirements result in two distinct problems for efficiency. I argue that two financial arrangements, tranching and financial pyramiding, arise in developed capital markets in response to the challenges posed by collateral requirements. If these arrangements are sufficiently developed, then the pareto efficiency of competitive equilibria is restored.
Keywords: Collateral, pareto optimality, financial arrangements
JEL Classification: D52, D61, G28
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
By Yakov Amihud
-
Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
By Yakov Amihud
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Is Information Risk a Determinant of Asset Returns?
By David Easley, Soeren Hvidkjaer, ...
-
By Tarun Chordia, Avanidhar Subrahmanyam, ...
-
Common Factors in Prices, Order Flows and Liquidity
By Joel Hasbrouck and Duane J. Seppi
-
Common Factors in Prices, Order Flows and Liquidity
By Joel Hasbrouck and Duane J. Seppi