COLLATERAL REQUIREMENTS AND ASSET PRICES

Johannes Brumm, Michael Grill, Felix Kubler and Karl Schmedders

International Economic Review, 2015, vol. 56, issue 1, 1-25

Abstract: Many assets derive their value not only from future cash flows but also from their ability to serve as collateral. In this article, we investigate this collateral premium and its impact on asset returns in an infinite‐horizon general equilibrium model with heterogeneous agents. We document that borrowing against collateral substantially increases the return volatility of long‐lived assets. Moreover, otherwise identical assets with different degrees of collateralizability exhibit substantially different return dynamics because their prices contain a sizable collateral premium that varies over time. This premium can be positive even for assets that never pay dividends.

Date: 2015
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https://doi.org/10.1111/iere.12092

Related works:
Working Paper: Collateral requirements and asset prices (2013)
Working Paper: Collateral Requirements and Asset Prices (2011)
Working Paper: Collateral Requirements and Asset Prices (2011)
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