Debt Financing in Asset Markets

Zhiguo He () and Wei Xiong

No 17935, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study rollover risk and collateral value in a dynamic asset pricing model with endogenous debt financing by extending the framework of Geanakoplos (2009) with a generic binomial tree and time-varying heterogeneous beliefs. Optimistic borrowers face rollover risk if the belief dispersion between the borrowers and the pessimistic lenders widens after interim bad news. We demonstrate the optimality of the maximum riskless short-term debt financing for optimistic borrowers even in the presence of the rollover risk. We also highlight the role of interim trading which, by allowing creditors to sell seized collateral to other optimists with saved cashes, boosts the asset's collateral value and equilibrium price.

JEL-codes: G01 G1 G32 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-ban and nep-fmk
Note: AP CF
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Citations: View citations in EconPapers (8)

Published as Zhiguo He & Wei Xiong, 2012. "Debt Financing in Asset Markets," American Economic Review, American Economic Association, vol. 102(3), pages 88-94, May.

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Journal Article: Debt Financing in Asset Markets (2012)
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