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Equilibrium in collateralized asset markets: Credit contractions and negative equity loans

Author

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  • Iraola, Miguel A.
  • Torres-Martínez, Juan Pablo

Abstract

We address a general equilibrium model with collateralized debt, credit contractions, and financial market segmentation. Restrictions on credit access make borrower’s optimal payment strategies–coupon payment, prepayment, and default–sensitive to idiosyncratic factors, even though the only payment enforcement is the seizure of collateral guarantees. We prove equilibrium existence, characterize optimal borrower’s payment strategies, and provide a numerical example illustrating our main results. A remarkable feature of our model is that it rationalizes the prevalence of negative equity non-recourse loans.

Suggested Citation

  • Iraola, Miguel A. & Torres-Martínez, Juan Pablo, 2014. "Equilibrium in collateralized asset markets: Credit contractions and negative equity loans," Journal of Mathematical Economics, Elsevier, vol. 55(C), pages 113-122.
  • Handle: RePEc:eee:mateco:v:55:y:2014:i:c:p:113-122
    DOI: 10.1016/j.jmateco.2014.10.006
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    References listed on IDEAS

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    Cited by:

    1. Cea-Echenique, Sebastián & Torres-Martínez, Juan Pablo, 2016. "Credit segmentation in general equilibrium," Journal of Mathematical Economics, Elsevier, vol. 62(C), pages 19-27.
    2. repec:hal:journl:hal-01151576 is not listed on IDEAS

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