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Collateral constraints and asset prices

Author

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  • Chabakauri, Georgy
  • Yueyang Han, Brandon

Abstract

We study the effects of collateral constraints in an economy populated by investors with nonpledgeable labor incomes and heterogeneous preferences and beliefs. We show that these constraints inflate stock prices and generate spikes and crashes in price-dividend ratios and volatilities, clustering of volatilities, and leverage cycles. They also lead to substantial decreases in interest rates and increases in Sharpe ratios when investors are anxious about hitting constraints due to production crises in the economy. Furthermore, stock prices have large collateral premiums over nonpledgeable incomes. We derive asset prices and stationary distributions of the investors' consumption shares in closed form.

Suggested Citation

  • Chabakauri, Georgy & Yueyang Han, Brandon, 2020. "Collateral constraints and asset prices," LSE Research Online Documents on Economics 102699, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:102699
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    File URL: http://eprints.lse.ac.uk/102699/
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    Cited by:

    1. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2023. "Re-use of collateral: Leverage, volatility, and welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 19-46, January.

    More about this item

    Keywords

    collateral; nonpledgeable labor income; heterogeneous preferences; disagreement; asset prices; stationary equilibrium; Paul Woolley Centre;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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