Over-the-Counter Trade and the Value of Assets as Collateral

Athanasios Geromichalos, Jiwon Lee, Seungduck Lee and Keita Oikawa

No 96, Working Papers from University of California, Davis, Department of Economics

Abstract: We study asset pricing within a general equilibrium model where unsecured credit is ruled out, and a real asset helps agents carry out mutually beneficial transactions by serving as collateral. A unique feature of our model is that the agent who provides the loan might have a low valu- ation for the collateral asset. Nevertheless, the lender rationally chooses to accept the collateral because she can access a secondary asset market where she can sell the asset. Following a recent strand of the finance literature, based on the influential work of Duffie, G?arleanu, and Pedersen (2005), we model this secondary asset market as an over-the-counter market characterized by search and bargaining frictions. We study how the asset?s property to serve as collateral affects its equilibrium price, and how the asset price and the economy?s welfare are affected by the degree of liquidity in the secondary asset market.

Keywords: asset prices; collateral; monetary-search models; liquidity; over-the-counter markets (search for similar items in EconPapers)
JEL-codes: E31 E50 E52 G12 (search for similar items in EconPapers)
Pages: 32
Date: 2014-11-11
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Related works:
Journal Article: Over-the-counter trade and the value of assets as collateral (2016)
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