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An Option-Based Model of Equilibrium Credit Rationing

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  • Mason, R

Abstract

This paper applies options theory to the model of equilibrium credit rationing developed by Stiglitz and Weiss (1981) by noticing that, given a standard debt contract and limited liability, the payoffs to the lender and the borrower when a loan is make involve a put option and a call option respectively. Information asymmetry is modelled using stochastic volatility option pricing methods.

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Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 128.

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Length: 14 pages
Date of creation: 1996
Date of revision:
Handle: RePEc:nuf:econwp:128

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Web page: http://www.nuff.ox.ac.uk/economics/

Related research

Keywords: CREDIT ; ECONOMIC EQUILIBRIUM ; DEBT ; INFORMATION;

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References

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  1. Kugler, Peter, 1987. "Credit rationing and the adjustment of the loan rate: An empirical investigation," Journal of Macroeconomics, Elsevier, Elsevier, vol. 9(4), pages 505-525.
  2. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 281-92, May.
  3. Webb, David C, 1991. "Long-term Financial Contracts Can Mitigate the Adverse Selection Problem in Project Financing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(2), pages 305-20, May.
  4. Berger, Allen N & Udell, Gregory F, 1992. "Some Evidence on the Empirical Significance of Credit Rationing," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(5), pages 1047-77, October.
  5. Heston, Steven L, 1993. " Invisible Parameters in Option Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 48(3), pages 933-47, July.
  6. Stein, Elias M & Stein, Jeremy C, 1991. "Stock Price Distributions with Stochastic Volatility: An Analytic Approach," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 4(4), pages 727-52.
  7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  8. Chesney, Marc & Scott, Louis, 1989. "Pricing European Currency Options: A Comparison of the Modified Black-Scholes Model and a Random Variance Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 24(03), pages 267-284, September.
  9. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, Elsevier, vol. 2(3), pages 225-243, September.
  10. Ito, Takatoshi & Ueda, Kazuo, 1981. "Tests of the Equilibrium Hypothesis in Disequilibrium Econometrics: An International Comparison of Credit Rationing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(3), pages 691-708, October.
  11. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  12. Jaffee, Dwight M & Russell, Thomas, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 651-66, November.
  13. Martin, Christopher, 1990. "Corporate Borrowing and Credit Constraints: Structural Disequilibrium Estimates for the U.K," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 78-86, February.
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Cited by:
  1. Galina Hale & Carlos Arteta, 2007. "Currency crises and foreign credit in emerging markets: credit crunch or demand effect?," Working Paper Series, Federal Reserve Bank of San Francisco 2007-02, Federal Reserve Bank of San Francisco.
  2. Carlos Arteta & Galina Hale, 2006. "Sovereign debt crises and credit to the private sector," Working Paper Series, Federal Reserve Bank of San Francisco 2006-21, Federal Reserve Bank of San Francisco.

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