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Collateral requirements and asset prices


Kübler, Felix; Schmedders, Karl; Brumm, Johannes; Grill, Michael (2015). Collateral requirements and asset prices. International Economic Review, 56(1):1-25.

Abstract

Many assets derive their value not only from future cash flows but also from their ability to serve as collateral. In this paper, we investigate this collateral premium and its impact on asset returns in an infinite-horizon general equilibrium model with heterogeneous agents facing col- lateral constraints for borrowing. We document that borrowing against collateral substantially increases the return volatility of long-lived assets. Moreover, otherwise identical assets with different degrees of collateralizability exhibit substantially different return dynamics because their prices contain a sizable collateral premium that varies over time. This premium can be positive even for assets that never pay dividends.

Abstract

Many assets derive their value not only from future cash flows but also from their ability to serve as collateral. In this paper, we investigate this collateral premium and its impact on asset returns in an infinite-horizon general equilibrium model with heterogeneous agents facing col- lateral constraints for borrowing. We document that borrowing against collateral substantially increases the return volatility of long-lived assets. Moreover, otherwise identical assets with different degrees of collateralizability exhibit substantially different return dynamics because their prices contain a sizable collateral premium that varies over time. This premium can be positive even for assets that never pay dividends.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Economics and Econometrics
Language:English
Date:1 February 2015
Deposited On:04 Mar 2014 09:29
Last Modified:30 Jul 2020 12:44
Publisher:Wiley-Blackwell
ISSN:0020-6598
OA Status:Closed
Publisher DOI:https://doi.org/10.1111/iere.12092
Other Identification Number:merlin-id:8952

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