Equilibrium in collateralized asset markets: Credit contractions and negative equity loans

Miguel Iraola and Juan Pablo Torres-Martinez

Journal of Mathematical Economics, 2014, vol. 55, issue C, 113-122

Abstract: We address a general equilibrium model with collateralized debt, credit contractions, and financial market segmentation. Restrictions on credit access make borrower’s optimal payment strategies–coupon payment, prepayment, and default–sensitive to idiosyncratic factors, even though the only payment enforcement is the seizure of collateral guarantees. We prove equilibrium existence, characterize optimal borrower’s payment strategies, and provide a numerical example illustrating our main results. A remarkable feature of our model is that it rationalizes the prevalence of negative equity non-recourse loans.

Keywords: Asset-backed securities; Credit contractions; Equilibrium existence (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:55:y:2014:i:c:p:113-122

DOI: 10.1016/j.jmateco.2014.10.006

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