Divergent risk-attitudes and endogenous collateral constraints

Giuliano Curatola and Ester Faia

Journal of Economic Theory, 2021, vol. 192, issue C

Abstract: Financial crises are anticipated by leverage build-up and asset price booms and followed by sharp de-leveraging and asset price burst. Leverage pro-cyclicality, debt margins counter-cyclicality and heightened asset price volatility are often hard to reconcile with credit frictions models, with and without occasionally binding constraints. We show that a model in which the anticipatory effects of occasionally binding collateral constraints interact with borrowers' time-varying risk-attitudes (modeled through gain-loss reference dependent utilities) and with borrowers/lenders risk-attitudes heterogeneity can explain those facts. Simulations through global methods show that the model can also match numerous statistics characterizing the asset price and leverage cycles.

Keywords: Loss averse borrowers; Risk-tolerance; Endogenous debt margins; Leverage cycle; Occasionally binding constraints (search for similar items in EconPapers)
JEL-codes: E0 E5 G01 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S002205312030168X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:192:y:2021:i:c:s002205312030168x

DOI: 10.1016/j.jet.2020.105175

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().