 Collateralized borrowing and increasing riskEconomic Theory, 2017, vol. 63, issue 2, No 5, 502 pages Abstract: Abstract This paper uses a general equilibrium model with collateralized borrowing to show that increases in risk can have ambiguous effects on leverage, loan margins, loan amounts, and asset prices. Increasing risk about future payoffs and endowments can lead to riskier loans with larger balances and lower spreads even when lenders are risk averse and borrowers can default. As well, increasing the covariance of either agents’ endowments with the asset payoff can have ambiguous consequences for equilibrium. Though the effects are ambiguous, key determinants of how increased risk translates into changes in prices and allocations are the covariance of agents’ endowments with the asset payoff, agents’ risk aversion, and the location of increased risk in the distribution of future states. Some restricted changes in the borrower’s or lender’s endowments can have unambiguous but asymmetric effects on equilibrium. Keywords: Asset prices; Collateral constraints; Leverage; Risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:63:y:2017:i:2:d:10.1007_s00199-015-0943-2 Ordering information: This journal article can be ordered from DOI: 10.1007/s00199-015-0943-2 Access Statistics for this article Economic Theory is currently edited by Nichoals Yanneils More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC. |
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