Liquidity Contractions and Prepayment Risk on Collateralized Asset Markets
This paper presents a dynamic general equilibrium model with default and collateral requirements. In contrast with previous literature, our model allows for liquidity contractions and general prepayment specifications. We show that liquidity substantially affects credit and prepayment risks, and that different borrowers may follow differentiated payment strategies: whereas some pay, others prepay or default. The lack of liquidity increases debtors' willingness to continue paying, even thought prepayment cost could be higher than the collateral value. This mechanism rationalizes underwater mortgages. We prove existence of equilibrium, and provide a numerical example illustrating the main determinants of optimal payment strategies.
|Date of creation:||2012|
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Econometric Society, vol. 70(4), pages 1613-1638, July.
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"Getting at Systemic Risk via an Agent-Based Model of the Housing Market,"
Cowles Foundation Discussion Papers
1852, Cowles Foundation for Research in Economics, Yale University.
- John Geanakoplos & Robert Axtell & J. Doyne Farmer & Peter Howitt & Benjamin Conlee & Jonathan Goldstein & Matthew Hendrey & Nathan M. Palmer & Chun-Yi Yang, 2012. "Getting at Systemic Risk via an Agent-Based Model of the Housing Market," American Economic Review, American Economic Association, vol. 102(3), pages 53-58, May.
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