The collateralizability premium

Hengjie Ai, Jun E. Li, Kai Li and Christian Schlag

No 264, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: A common prediction of macroeconomic models of credit market frictions is that the tightness of financial constraints is countercyclical. As a result, theory implies a negative collateralizability premium; that is, capital that can be used as collateral to relax financial constraints provides insurance against aggregate shocks and commands a lower risk compensation compared with non-collateralizable assets. We show that a longshort portfolio constructed using a novel measure of asset collateralizability generates an average excess return of around 8% per year. We develop a general equilibrium model with heterogeneous firms and financial constraints to quantitatively account for the collateralizability premium.

Keywords: Cross-Section of Returns; Financial Frictions; Collateral Constraint (search for similar items in EconPapers)
JEL-codes: E2 E3 G12 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ore
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Related works:
Journal Article: The Collateralizability Premium (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:264

DOI: 10.2139/ssrn.3474975

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