Over-the-counter trade and the value of assets as collateral

Athanasios Geromichalos, Jiwon Lee (), Seungduck Lee () and Keita Oikawa
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Jiwon Lee: University of California, Davis
Seungduck Lee: University of California, Davis

Economic Theory, 2016, vol. 62, issue 3, No 2, 443-475

Abstract: Abstract We study asset pricing within a general equilibrium model where unsecured credit is ruled out, and a real asset helps agents carry out mutually beneficial transactions by serving as collateral. A unique feature of our model is that the agent who provides the loan might have a low valuation for the collateral asset. Nevertheless, the lender rationally chooses to accept the collateral because she can access a secondary asset market where she can sell the asset. Following a recent strand of the finance literature, based on the influential work of Duffie et al. (Econometrica 73(6):1815–1847, 2005), we model this secondary asset market as an over-the-counter market characterized by search and bargaining frictions. We study how the asset’s property to serve as collateral affects its equilibrium price, and how the asset price and the economy’s welfare are affected by the degree of liquidity in the secondary asset market.

Keywords: Asset prices; Collateral; Monetary-search models; Liquidity; Over-the-counter markets (search for similar items in EconPapers)
JEL-codes: E31 E50 E52 G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (11)

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Working Paper: Over-the-Counter Trade and the Value of Assets as Collateral (2014)
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DOI: 10.1007/s00199-015-0904-9

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