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Collateral Equilibrium - A Basic Framework

  • John Geanakoplos

    (Yale University)

  • William Zame

    (University of California, Los Angeles)

Much of the lending in modern economies is secured by some form of collateral; residential and commercial mortgages and corporate bonds are familiar examples. This paper builds an extension of general equilibrium theory that incorporates durable goods, collateralized securities and the possibility of default to argue that the reliance on collateral to secure loans and the particular collateral requirements chosen by the social planner or by the market have a profound impact on prices, allocations, market structure and the efficiency of market outcomes. These findings provide insights into housing and mortgage markets, including the sub-prime mortgage market.

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File URL: http://www.eief.it/files/2013/09/wp-19-collateral-equilibrium-a-basic-framework.pdf
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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1319.

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Length: 59 pages
Date of creation: 2013
Date of revision: Aug 2013
Handle: RePEc:eie:wpaper:1319
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  1. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1994. "The Financial Accelerator and the Flight to Quality," NBER Working Papers 4789, National Bureau of Economic Research, Inc.
  2. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
  3. David K. Levine & William R. Zame, 1992. "Debt Constraints and Equilibrium in Infinite Horizon Economies with Incomplete Markets," UCLA Economics Working Papers 666, UCLA Department of Economics.
  4. William R. Zame, 1990. "Efficiency and the Role of Default When Security Markets are Incomplete," UCLA Economics Working Papers 585, UCLA Department of Economics.
  5. Páscoa, Mario Rui & Araújo, Aloísio Pessoa de & Torres-Martínez, Juan Pablo, 2001. "Collateral avoids Ponzi schemes in incomplete markets," Economics Working Papers (Ensaios Economicos da EPGE) 419, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
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  7. POLEMARCHAKIS, Heraklis M. & KU, Bon-Il, . "Options and equilibrium," CORE Discussion Papers RP 887, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. John Geanakoplos & Ana Fostel, 2008. "Leverage Cycles and the Anxious Economy," American Economic Review, American Economic Association, vol. 98(4), pages 1211-44, September.
  9. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  10. Mankiw, N. Gregory & Weil, David N., 1989. "The baby boom, the baby bust, and the housing market," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 235-258, May.
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  12. Mário Páscoa & Aloisio Araujo & José Fajardo, 2004. "Endogenous Collateral," Econometric Society 2004 Latin American Meetings 161, Econometric Society.
  13. Ana Fostel & John Geanakoplos, 2013. "Financial Innovation, Collateral and Investment," Working Papers 2013-18, The George Washington University, Institute for International Economic Policy.
  14. Hanno Lustig & Stijn Van Nieuwerburgh, 2003. "Housing Collateral, Consumption Insurance and Risk Premia: An Empirical Perpective," NBER Working Papers 9959, National Bureau of Economic Research, Inc.
  15. Kau James B. & Keenan Donald C. & Kim Taewon, 1994. "Default Probabilities for Mortgages," Journal of Urban Economics, Elsevier, vol. 35(3), pages 278-296, May.
  16. Lagos, Ricardo, 2010. "Asset prices and liquidity in an exchange economy," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 913-930, November.
  17. Ana Fostel & John Geanakoplos, 2011. "Tranching, CDS and Asset Prices: How Financial Innovation Can Cause Bubbles and Crashes," Cowles Foundation Discussion Papers 1809, Cowles Foundation for Research in Economics, Yale University.
  18. Sabarwal Tarun, 2003. "Competitive Equilibria With Incomplete Markets and Endogenous Bankruptcy," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-42, January.
  19. Ana Fostel & John Geanakoplos, 2013. "Leverage and Default in Binomial Economies: A Complete Characterization," Working Papers 2013-16, The George Washington University, Institute for International Economic Policy.
  20. Kristopher S. Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers 07-15, Federal Reserve Bank of Boston.
  21. Weerachart Kilenthong, 2011. "Collateral premia and risk sharing under limited commitment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(3), pages 475-501, April.
  22. Ana Fostel & John Geanakoplos, 2013. "Leverage and Default in Binomial Economies: A Complete Characterization," Levine's Working Paper Archive 786969000000000755, David K. Levine.
  23. Alp Simsek, 2013. "Belief Disagreements and Collateral Constraints," Econometrica, Econometric Society, vol. 81(1), pages 1-53, 01.
  24. 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.
  25. Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June.
  26. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June.
  27. Elul, Ronel, 1999. "Effectively complete equilibria--A note," Journal of Mathematical Economics, Elsevier, vol. 32(1), pages 113-119, August.
  28. Hellwig, Martin F, 1981. "Bankruptcy, Limited Liability, and the Modigliani-Miller Theorem," American Economic Review, American Economic Association, vol. 71(1), pages 155-70, March.
  29. Hernandez D., Alejandro & Santos, Manuel S., 1996. "Competitive Equilibria for Infinite-Horizon Economies with Incomplete Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 102-130, October.
  30. Lin, Emily Y. & White, Michelle J., 2001. "Bankruptcy and the Market for Mortgage and Home Improvement Loans," Journal of Urban Economics, Elsevier, vol. 50(1), pages 138-162, July.
  31. Duffie, Darrell & Shafer, Wayne, 1986. "Equilibrium in incomplete markets: II : Generic existence in stochastic economies," Journal of Mathematical Economics, Elsevier, vol. 15(3), pages 199-216, June.
  32. Steinert, Mariano & Torres-Martinez, Juan Pablo, 2007. "General equilibrium in CLO markets," Journal of Mathematical Economics, Elsevier, vol. 43(6), pages 709-734, August.
  33. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
  34. Ana Fostel & John Geanakoplos, 2012. "Leverage and Default in Binomial Economies: A Complete Characterization," Cowles Foundation Discussion Papers 1877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 2013.
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