Collateral constraints and asset prices

Georgy Chabakauri and Brandon Yueyang Han

Journal of Financial Economics, 2020, vol. 138, issue 3, 754-776

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; Heterogeneous preferences; Disagreement; Asset prices; Stationary equilibrium (search for similar items in EconPapers)
JEL-codes: D52 G12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:138:y:2020:i:3:p:754-776

DOI: 10.1016/j.jfineco.2020.06.012

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