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Financial constraints and collateral crises

Luis Araujo (), Bernardo Guimaraes and Diego de Sousa Rodrigues ()

Review of Economic Dynamics, 2020, vol. 38, 238-250

Abstract: Assessing the fundamental value of a wide range of asset-backed securities is costly. As a result, these assets can become information insensitive, which allows them to be used as collateral in credit transactions. In this paper, we show that while it is true that information-insensitive assets can play a liquidity role, the fact that they play this role reinforces their information insensitivity. This implies that the availability of alternative ways of financing can harm the liquidity role of assets, even if these alternatives are costly and not used in equilibrium. The reason is that such options raise the asset's sensitivity to information by increasing the relative importance of their fundamental value vis-a-vis their role as collateral. (Copyright: Elsevier)

Keywords: Financial crises; Asset-backed securities; Opacity; Private money (search for similar items in EconPapers)
JEL-codes: E32 E44 G01 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.red.2020.04.006

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