The Collateralizability Premium

Hengjie Ai, Jun E Li, Kai Li and Christian Schlag

The Review of Financial Studies, 2020, vol. 33, issue 12, 5821-5855

Abstract: A common prediction of macroeconomic models of credit market frictions is that the tightness of financial constraints is countercyclical. Theory suggests a negative collateralizability premium; that is, capital that can be used as collateral to relax financial constraints insures against aggregate shocks and commands a lower risk compensation compared with noncollateralizable assets. We show that a long-short portfolio constructed using a novel measure of asset collateralizability generates an average excess return of around 8% per year. We develop a general equilibrium model with heterogeneous firms and financial constraints to quantitatively account for the collateralizability premium.

JEL-codes: E2 E3 G12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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