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Over-the-counter trade and the value of assets as collateral

Author

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  • Athanasios Geromichalos

    (University of California, Davis)

  • Jiwon Lee

    (University of California, Davis)

  • Seungduck Lee

    (University of California, Davis)

  • Keita Oikawa

    (University of California, Davis)

Abstract

We study asset pricing within a general equilibrium model where unsecured credit is ruled out, and a real asset helps agents carry out mutually beneficial transactions by serving as collateral. A unique feature of our model is that the agent who provides the loan might have a low valuation for the collateral asset. Nevertheless, the lender rationally chooses to accept the collateral because she can access a secondary asset market where she can sell the asset. Following a recent strand of the finance literature, based on the influential work of Duffie et al. (Econometrica 73(6):1815–1847, 2005), we model this secondary asset market as an over-the-counter market characterized by search and bargaining frictions. We study how the asset’s property to serve as collateral affects its equilibrium price, and how the asset price and the economy’s welfare are affected by the degree of liquidity in the secondary asset market.

Suggested Citation

  • Athanasios Geromichalos & Jiwon Lee & Seungduck Lee & Keita Oikawa, 2016. "Over-the-counter trade and the value of assets as collateral," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(3), pages 443-475, August.
  • Handle: RePEc:spr:joecth:v:62:y:2016:i:3:d:10.1007_s00199-015-0904-9
    DOI: 10.1007/s00199-015-0904-9
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    Cited by:

    1. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 74010, University Library of Munich, Germany.
    2. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 73533, University Library of Munich, Germany.
    3. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 73707, University Library of Munich, Germany.
    4. Shin-ichi Fukuda & Mariko Tanaka, 2022. "Economic Geography and a Theory of International Currency: Implications of a Random Matching Model," CIRJE F-Series CIRJE-F-1184, CIRJE, Faculty of Economics, University of Tokyo.
    5. Athanasios Geromichalos & Kuk Mo Jung & Seungduck Lee & Dillon Carlos, 2019. "Asset Liquidity in Monetary Theory and Finance: A Unified Approach," Working Papers 1905, Research Institute for Market Economy, Sogang University.
    6. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 74615, University Library of Munich, Germany.
    7. Lee, Seungduck, 2016. "Money, Asset Prices and the Liquidity Premium," MPRA Paper 75869, University Library of Munich, Germany.
    8. Geromichalos, Athanasios & Jung, Kuk Mo & Lee, Seungduck & Carlos, Dillon, 2021. "A model of endogenous direct and indirect asset liquidity," European Economic Review, Elsevier, vol. 132(C).

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    More about this item

    Keywords

    Asset prices; Collateral; Monetary-search models; Liquidity; Over-the-counter markets;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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