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General equilibrium existence with asset-backed securitization

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Author Info
Mariano Steinert () (Department of Economics PUC-Rio)
Juan Pablo Torres-Martínez () (Department of Economics PUC-Rio)

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Abstract

We propose a specification of a general equilibrium model with securitization of collateral-backed promises and discuss the role of physical collateral to avoid, in equilibrium, pessimistic beliefs about the future rates of default. Promises are pooled in either pass-through securities or collateralized loans obligations (CLO), allowing the existence of different seniority lev- els among tranches in the same CLO. In case of default, borrowers may also suffer extra-economic penalties, which are internalized into a structure of non-ordered preferences. In this context, we prove the existence of an equilibrium in that investors are not over-pessimistic about the payments of derivatives. JEL Codes: D52, D91

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Publisher Info
Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 490.

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Length: 36p
Date of creation: Oct 2004
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Handle: RePEc:rio:texdis:490

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Related research
Keywords: Asset Backed-Securitization; Extra-economic Default Penalties; Collateral; Non- ordered Preferences;

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  1. Gale, D. & Mas-Colell, A., 1975. "An equilibrium existence theorem for a general model without ordered preferences," Journal of Mathematical Economics, Elsevier, vol. 2(1), pages 9-15, March. [Downloadable!] (restricted)
  2. Gale, D. & Mas-Colell, A., 1979. "Corrections to an equilibrium existence theorem for a general model without ordered preferences," Journal of Mathematical Economics, Elsevier, vol. 6(3), pages 297-298, December. [Downloadable!] (restricted)
  3. Franklin Allen & Douglas Gale, 2003. "Financial Intermediaries and Markets," Center for Financial Institutions Working Papers 00-44, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  4. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  5. John Geanakoplos, 1996. "Promises Promises," Cowles Foundation Discussion Papers 1143, Cowles Foundation, Yale University. [Downloadable!]
  6. Araujo, Aloisio. & Fajardo, J. & Páscoa. M. R., 2004. "Endogenous Collateral," Finance Lab Working Papers flwp_68, Finance Lab, Ibmec São Paulo. [Downloadable!]
    Other versions:
  7. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2001. "Default and Punishment in General Equilibrium," Cowles Foundation Discussion Papers 1304R5, Cowles Foundation, Yale University, revised Mar 2004. [Downloadable!]
    Other versions:
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