Debt Financing in Asset Markets
We study rollover risk and collateral value in a dynamic asset pricing model with endogenous debt financing by extending the framework of Geanakoplos (2009) with a generic binomial tree and time-varying heterogeneous beliefs. Optimistic borrowers face rollover risk if the belief dispersion between the borrowers and the pessimistic lenders widens after interim bad news. We demonstrate the optimality of the maximum riskless short-term debt financing for optimistic borrowers even in the presence of the rollover risk. We also highlight the role of interim trading which, by allowing creditors to sell seized collateral to other optimists with saved cashes, boosts the asset's collateral value and equilibrium price.
|Date of creation:||Mar 2012|
|Publication status:||published as Zhiguo He & Wei Xiong, 2012. "Debt Financing in Asset Markets," American Economic Review, American Economic Association, vol. 102(3), pages 88-94, May.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Zhiguo He & Wei Xiong, 2012.
"Rollover Risk and Credit Risk,"
Journal of Finance,
American Finance Association, vol. 67(2), pages 391-430, 04.
- Wei Xiong & Zhiguo He, 2010. "Rollover Risk and Credit Risk," 2010 Meeting Papers 98, Society for Economic Dynamics.
- Zhiguo He & Wei Xiong, 2010. "Rollover Risk and Credit Risk," NBER Working Papers 15653, National Bureau of Economic Research, Inc.
- Wei Xiong & Zhiguo He, 2011. "Dynamic Debt Runs," 2011 Meeting Papers 902, Society for Economic Dynamics.
- John Geanakoplos, 2009. "The Leverage Cycle," Cowles Foundation Discussion Papers 1715R, Cowles Foundation for Research in Economics, Yale University, revised Jan 2010.
- John Geanakoplos, 2010. "The Leverage Cycle," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 1-65 National Bureau of Economic Research, Inc.
- Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March. Full references (including those not matched with items on IDEAS)
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