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Over-the-Counter Trade and the Value of Assets as Collateral

  • Athanasios Geromichalos
  • Jiwon Lee
  • Seungduck Lee
  • Keita Oikawa

    (Department of Economics, University of California Davis)

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 valu- ation 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, Gˆarleanu, and Pedersen (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.

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Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 143.

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Length: 32
Date of creation: 12 Nov 2014
Date of revision:
Handle: RePEc:cda:wpaper:14-3
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  1. Hanno Lustig, 2004. "The Market Price of Aggregate Risk and the Wealth Distribution," UCLA Economics Online Papers 299, UCLA Department of Economics.
  2. GOTTARDI, Piero & KUBLER, Felix, 2012. "Dynamic Competitive Economies with Complete Markets and Collateral Constraints," Economics Working Papers ECO2012/17, European University Institute.
  3. Kehoe, Timothy J. & Levine, David K. & Mas-Colell, Andreu & Woodford, Michael, 1991. "Gross substitutability in large-square economies," Journal of Economic Theory, Elsevier, vol. 54(1), pages 1-25, June.
  4. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  5. Abdelkrim Seghir & Juan Pablo Torres-Martinez, 2006. "Wealth transfers and the role of collateral when lifetimes are uncertain," Textos para discussão 527, Department of Economics PUC-Rio (Brazil).
  6. Páscoa, Mário Rui & Seghir, Abdelkrim, 2009. "Harsh default penalties lead to Ponzi schemes," Games and Economic Behavior, Elsevier, vol. 65(1), pages 270-286, January.
  7. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  8. Aloisio Ara�jo & Jaime Orrillo & Mario R. Páscoa, 2000. "Equilibrium with Default and Endogenous Collateral," Mathematical Finance, Wiley Blackwell, vol. 10(1), pages 1-21.
  9. Felix Kubler & Karl Schmedders, 2001. "Stationary Equilibria in Asset-Pricing Models with Incomplete Markets and Collateral," Discussion Papers 1319, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Ana Fostel & John Geanakoplos, 2012. "Tranching, CDS, and Asset Prices: How Financial Innovation Can Cause Bubbles and Crashes," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 190-225, January.
  11. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153, March.
  12. Rubén Poblete-Cazenave & Juan Torres-Martínez, 2013. "Equilibrium with limited-recourse collateralized loans," Economic Theory, Springer, vol. 53(1), pages 181-211, May.
  13. Araújo, Aloísio & Kubler, Felix & Schommer, Susan, 2012. "Regulating collateral-requirements when markets are incomplete," Journal of Economic Theory, Elsevier, vol. 147(2), pages 450-476.
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