IDEAS home Printed from https://ideas.repec.org/a/inm/oropre/v72y2024i3p871-884.html
   My bibliography  Save this article

Endogenous Credit, Business Cycle, and Portfolio Selection

Author

Listed:
  • Kyoung Jin Choi

    (Haskayne School of Business, University of Calgary, Calgary, Alberta T2N 1N4, Canada)

  • Hyeng Keun Koo

    (Department of Financial Engineering, School of Business, Ajou University, Suwon 16499, Republic of Korea; Department of Industrial and Management Engineering, POSTECH, Pohang 37673, Republic of Korea)

  • Byung Hwa Lim

    (Department of Fintech, SKK Business School, Sungkyunkwan University, Seoul 03063, Republic of Korea)

  • Jane Yoo

    (Department of Financial Engineering, School of Business, Ajou University, Suwon 16499, Republic of Korea)

Abstract

We study a continuous-time model of consumption and portfolio selection of an agent with a limited ability to commit to a debt contract in which the credit limit is endogenously determined. We consider the case where the agent borrows against future income and/or collateral assets. We also study the determination of the credit limit in a general equilibrium model. We derive the credit limit in closed form. The credit limit is smaller than the natural limit because of limited commitment and an increasing function of both income and the collateral price. We extend the baseline model to the case with a regime switch and show that the credit limit is cyclical; it is lower (higher) when the Sharpe ratio is high (low). The model predicts that the rich tend to increase the proportion of risky investments in downturns, whereas the poor decrease them.

Suggested Citation

  • Kyoung Jin Choi & Hyeng Keun Koo & Byung Hwa Lim & Jane Yoo, 2024. "Endogenous Credit, Business Cycle, and Portfolio Selection," Operations Research, INFORMS, vol. 72(3), pages 871-884, May.
    • Handle: RePEc:inm:oropre:v:72:y:2024:i:3:p:871-884
    DOI: 10.1287/opre.2021.0351
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/opre.2021.0351
    Download Restriction: no
    File URL: https://libkey.io/10.1287/opre.2021.0351?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:oropre:v:72:y:2024:i:3:p:871-884. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.