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

Listed author(s):
  • Iraola, Miguel
  • Torres-Martínez, Juan Pablo

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.

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File URL: https://mpra.ub.uni-muenchen.de/46838/1/MPRA_paper_46838.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 46838.

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Date of creation: May 2013
Handle: RePEc:pra:mprapa:46838
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  1. Aouani, Zaier & Cornet, Bernard, 2009. "Existence of financial equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, vol. 45(12), pages 772-786, December.
  2. Rubén Poblete-Cazenave & Juan Torres-Martínez, 2013. "Equilibrium with limited-recourse collateralized loans," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(1), pages 181-211, May.
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  8. Magill, Michael & Quinzii, Martine, 1996. "Incomplete markets over an infinite horizon: Long-lived securities and speculative bubbles," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 133-170.
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