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Liquidity Contractions, Incomplete Financial Participation and the Prevalence of Negative Equity Non-recourse Loans

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  • Iraola, Miguel
  • Torres-Martínez, Juan Pablo

Abstract

We address a dynamic general equilibrium model where securities are backed by collateralized loans, and borrowers face endogenous liquidity contractions and financial participation constraints. Although the only payment enforcement is the seizure of collateral guarantees, restrictions on credit access make individually optimal payment strategies---coupon payment, prepayment, and default---sensitive to idiosyncratic factors. In particular, the lack of liquidity and the presence of financial participation constraints rationalize the prevalence of negative equity loans. We prove equilibrium existence, characterize optimal payment strategies, and provide a numerical example illustrating our main results.

Suggested Citation

  • Iraola, Miguel & Torres-Martínez, Juan Pablo, 2013. "Liquidity Contractions, Incomplete Financial Participation and the Prevalence of Negative Equity Non-recourse Loans," MPRA Paper 46838, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:46838
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Asset-Backed Securities - Liquidity Contractions - Incomplete Financial Participation;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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