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General equilibrium existence with asset-backed securitization

  • Mariano Steinert


    (Department of Economics PUC-Rio)

  • Juan Pablo Torres-Martínez


    (Department of Economics PUC-Rio)

We propose a specification of a general equilibrium model with securitization of collateral-backed promises and discuss the role of physical collateral to avoid, in equilibrium, pessimistic beliefs about the future rates of default. Promises are pooled in either pass-through securities or collateralized loans obligations (CLO), allowing the existence of different seniority lev- els among tranches in the same CLO. In case of default, borrowers may also suffer extra-economic penalties, which are internalized into a structure of non-ordered preferences. In this context, we prove the existence of an equilibrium in that investors are not over-pessimistic about the payments of derivatives. JEL Codes: D52, D91

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Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 490.

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Length: 36p
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:rio:texdis:490
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  1. Gale, D. & Mas-Colell, A., 1975. "An equilibrium existence theorem for a general model without ordered preferences," Journal of Mathematical Economics, Elsevier, vol. 2(1), pages 9-15, March.
  2. Araujo, Aloisio. & Fajardo, J. & Páscoa. M. R., 2004. "Endogenous Collateral," Finance Lab Working Papers flwp_68, Finance Lab, Insper Instituto de Ensino e Pesquisa.
  3. repec:bla:restud:v:51:y:1984:i:3:p:393-414 is not listed on IDEAS
  4. Gale, D. & Mas-Colell, A., 1979. "Corrections to an equilibrium existence theorem for a general model without ordered preferences," Journal of Mathematical Economics, Elsevier, vol. 6(3), pages 297-298, December.
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