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Collateral Requirements and Asset Prices

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Author Info

  • Michael Grill

    (University of Mannheim)

  • Karl Schmedders

    (University of Zurich)

  • Felix Kubler

    (University of Zurich)

  • Johannes Brumm

    (University of Mannheim)

Abstract

In this paper we examine the effect of collateral requirements on the prices of long- lived assets. We consider a Lucas-style infinite-horizon exchange economy with heteroge- nous agents and collateral constraints. There are two trees in the economy which can be used as collateral for short-term loans. For the first tree the collateral requirement is determined endogenously while the collateral requirement for loans on the second tree are exogenously regulated. We show that the presence of collateral constraints and the endogenous margin requirements for the first tree lead to large excess price-volatility of the second tree. Changes in the regulated margin requirements for the second tree have large effects on the volatility of both trees. While tightening margins for loans on the second tree always decreases the price volatility of the first tree, price volatility of the second tree might very well increase with this change. In our calibration we allow for the possibility of disaster states. This leads to very large quantitative effects of collateral requirements and to realistic equity risk premia. We show that our qualitative results are robust to the actual parametrization of the economy.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 737.

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Date of creation: 2011
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Handle: RePEc:red:sed011:737

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  1. Lettau, Martin & Uhlig, Harald, 2002. "The Sharpe Ratio And Preferences: A Parametric Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 6(02), pages 242-265, April.
  2. Gromb, Denis & Vayanos, Dimitri, 2001. "Equilibrium and Welfare in Markets with Financially Constrained Arbitrageurs," CEPR Discussion Papers 3049, C.E.P.R. Discussion Papers.
  3. Coen-Pirani, Daniele, 2005. "Margin requirements and equilibrium asset prices," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 449-475, March.
  4. repec:fth:starer:9825 is not listed on IDEAS
  5. Robert J. Barro, 2009. "Rare Disasters, Asset Prices, and Welfare Costs," American Economic Review, American Economic Association, vol. 99(1), pages 243-64, March.
  6. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  7. Detemple, Jerome & Murthy, Shashidhar, 1997. "Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1133-74.
  8. Lasse Heje Pederson & Markus K Brunnermeier, 2007. "Market Liquidity and Funding Liquidity," FMG Discussion Papers dp580, Financial Markets Group.
  9. S. Rao Aiyagari & Mark Gertler, 1998. ""Overreaction" of Asset Prices in General Equilibrium," NBER Working Papers 6747, National Bureau of Economic Research, Inc.
  10. Nicolae Gârleanu & Lasse Heje Pedersen, 2011. "Margin-Based Asset Pricing and Deviations from the Law of One Price," NBER Working Papers 16777, National Bureau of Economic Research, Inc.
  11. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, vol. 101(5), pages 2108-31, August.
  12. Karl Schmedders, Felix Kubler, 2001. "Asset Pricing in Models with incomplete markets and default," Computing in Economics and Finance 2001 58, Society for Computational Economics.
  13. repec:fth:starer:98-25 is not listed on IDEAS
  14. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
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  1. Collateral requirements and asset prices
    by Christian Zimmermann in NEP-DGE blog on 2013-12-10 03:43:45
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Cited by:
  1. Dan Cao, 2011. "Collateral Shortages, Asset Price and Investment Volatility with Heterogeneous Beliefs," Working Papers gueconwpa~11-11-01, Georgetown University, Department of Economics.
  2. Eleonora Granziera & Sharon Kozocki, 2012. "House Price Dynamics: Fundamentals and Expectations," Working Papers 12-12, Bank of Canada.
  3. Winfried Koeniger & Thomas Hintermaier, 2012. "Collateral constraints and macroeconomic volatility," 2012 Meeting Papers 390, Society for Economic Dynamics.

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