Liquidity Contractions, Incomplete Financial Participation and the Prevalence of Negative Equity Non-recourse Loans

Miguel Iraola and Juan Pablo Torres-Martinez

MPRA Paper from University Library of Munich, Germany

Abstract: We address a dynamic general equilibrium model where securities are backed by collateralized loans, and borrowers face endogenous liquidity contractions and financial participation constraints. Although the only payment enforcement is the seizure of collateral guarantees, restrictions on credit access make individually optimal payment strategies---coupon payment, prepayment, and default---sensitive to idiosyncratic factors. In particular, the lack of liquidity and the presence of financial participation constraints rationalize the prevalence of negative equity loans. We prove equilibrium existence, characterize optimal payment strategies, and provide a numerical example illustrating our main results.

Keywords: Asset-Backed; Securities; -; Liquidity; Contractions; -; Incomplete; Financial; Participation (search for similar items in EconPapers)
JEL-codes: D52 D53 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-ban and nep-dge
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Related works:
Working Paper: Liquidity Contractions, Incomplete Financial Participation and the Prevalence of Negative Equity Non-Recourse Loans (2013)
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