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Endogenous Borrowing Constraints with Incomplete Markets

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  • Zhang, H.H.

Abstract

This article develops ways to endogenize the borrowing constraints used in a class of computable incomplete markets models. The authors allow the constraints to depend on an investor's characteristics, such as time preference, risk aversion, and income streams. The proposed constraint can be interpreted as a borrowing limit within which an investor has no incentive to default. Using a numerical algorithm, the authors find that, for an array of structural parameters, the endogenous borrowing constraints can be much less stringent than the ad hoc borrowing constraints adopted by the existing studies. Copyright 1997 by American Finance Association.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Zhang, H.H., 1995. "Endogenous Borrowing Constraints with Incomplete Markets," GSIA Working Papers 1995-25, Carnegie Mellon University, Tepper School of Business.
  • Handle: RePEc:cmu:gsiawp:1995-25
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    Keywords

    FINANCIAL MARKET; RISK AVERSION; INTERNATIONAL FINANCE; CREDIT;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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