Collateral constraints and asset prices

Georgy Chabakauri and Brandon Yueyang Han

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study the effects of collateral constraints in an economy populated by investors with nonpledgeable labor incomes and heterogeneous preferences and beliefs. We show that these constraints inflate stock prices and generate spikes and crashes in price-dividend ratios and volatilities, clustering of volatilities, and leverage cycles. They also lead to substantial decreases in interest rates and increases in Sharpe ratios when investors are anxious about hitting constraints due to production crises in the economy. Furthermore, stock prices have large collateral premiums over nonpledgeable incomes. We derive asset prices and stationary distributions of the investors' consumption shares in closed form.

Keywords: collateral; nonpledgeable labor income; heterogeneous preferences; disagreement; asset prices; stationary equilibrium; Paul Woolley Centre (search for similar items in EconPapers)
JEL-codes: D52 G12 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2020-12-01
New Economics Papers: this item is included in nep-fdg and nep-ore
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Citations: View citations in EconPapers (1)

Published in Journal of Financial Economics, 1, December, 2020, 138(3), pp. 754 - 776. ISSN: 0304-405X

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:102699

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