Debt Financing in Asset Markets
We study rollover risk and collateral value in a dynamic asset pricing model with endogenous debt financing by extending the framework of Geanakoplos (2009) with a generic binomial tree and time-varying heterogeneous beliefs. Optimistic borrowers face rollover risk if the belief dispersion between the borrowers and the pessimistic lenders widens after interim bad news. We demonstrate the optimality of the maximum riskless short-term debt financing for optimistic borrowers even in the presence of the rollover risk. We also highlight the role of interim trading which, by allowing creditors to sell seized collateral to other optimists with saved cashes, boosts the asset's collateral value and equilibrium price.
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Volume (Year): 102 (2012)
Issue (Month): 3 (May)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John Geanakoplos, 2010. "The Leverage Cycle," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 1-65 National Bureau of Economic Research, Inc.
- Zhiguo He & Wei Xiong, 2010.
"Rollover Risk and Credit Risk,"
NBER Working Papers
15653, National Bureau of Economic Research, Inc.
- Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
- John Geanakoplos, 2009. "The Leverage Cycle," Cowles Foundation Discussion Papers 1715R, Cowles Foundation for Research in Economics, Yale University, revised Jan 2010.
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