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Financial constraints and collateral crises

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

No 2007, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: Assessing the fundamental value of a wide range of asset-backed securities is costly. As aresult, these assets can become information insensitive, which allows them to be used as collateralin credit transactions. In this paper, we show that while it is true that information-insensitiveassets can play a liquidity role, the fact that they play this role reinforces their informationinsensitivity. This implies that the availability of alternative ways of financing can harm theliquidity role of assets, even if these alternatives are costly and not used in equilibrium. Thereason is that such options raise the asset’s sensitivity to information by increasing the relativeimportance of their fundamental value vis-a-vis their role as collateral

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)
Pages: 22 pages
Date: 2020-02
New Economics Papers: this item is included in nep-mac
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