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Collateral requirements and asset prices

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  • Brumm, Johannes
  • Grill, Michael
  • Kubler, Felix
  • Schmedders, Karl

Abstract

Many assets derive their value not only from future cash flows but also from their ability to serve as collateral. In this paper, we investigate this collateral value and its impact on asset returns in an infinite-horizon general equilibrium model with heterogeneous agents facing collateral constraints for borrowing. We document that borrowing against collateral substantially increases the return volatility of long-lived assets. Moreover, otherwise identical assets with different degrees of collateralizability exhibit substantially different return dynamics because their prices contain a sizable collateral premium that varies over time. This premium can be positive even for assets that never pay dividends.

Suggested Citation

  • Brumm, Johannes & Grill, Michael & Kubler, Felix & Schmedders, Karl, 2013. "Collateral requirements and asset prices," Discussion Papers 44/2013, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:442013
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    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
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    9. Felix Kubler & Karl Schmedders, 2003. "Stationary Equilibria in Asset-Pricing Models with Incomplete Markets and Collateral," Econometrica, Econometric Society, vol. 71(6), pages 1767-1793, November.
    10. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, vol. 101(5), pages 2108-2131, August.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Collateral requirements and asset prices
      by Christian Zimmermann in NEP-DGE blog on 2013-12-10 09:43:45

    Citations

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    Cited by:

    1. Denis Gromb & Dimitri Vayanos, 2018. "The Dynamics of Financially Constrained Arbitrage," Journal of Finance, American Finance Association, vol. 73(4), pages 1713-1750, August.
    2. Brumm, Johannes & Grill, Michael & Kubler, Felix & Schmedders, Karl, 2015. "Margin regulation and volatility," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 54-68.
    3. Miglietta, Arianna & Picillo, Cristina & Pietrunti, Mario, 2019. "The impact of margin policies on the Italian repo market," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    4. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2017. "Re-Use of Collateral: Leverage, Volatility, and Welfare," Swiss Finance Institute Research Paper Series 17-04, Swiss Finance Institute.
    5. Hans Gersbach & Jean-Charles Rochet & Martin Scheffel, 2017. "Financial Intermediation, Capital Accumulation and Crisis Recovery," Swiss Finance Institute Research Paper Series 17-38, Swiss Finance Institute.
    6. Dan Vu Cao, 2010. "Collateral Shortages, Asset Price And Investment Volatility With Heterogeneous Beliefs," 2010 Meeting Papers 1233, Society for Economic Dynamics.
    7. Granziera, Eleonora & Kozicki, Sharon, 2015. "House price dynamics: Fundamentals and expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 60(C), pages 152-165.
    8. Devereux, Michael B. & Young, Eric R. & Yu, Changhua, 2019. "Capital controls and monetary policy in sudden-stop economies," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 52-74.
    9. Feixue Gong & Gregory Phelan, 2020. "Collateral Constraints, Tranching, and Price Bases," Department of Economics Working Papers 2020-03, Department of Economics, Williams College.
    10. Chabakauri, Georgy & Rytchkov, Oleg, 2014. "Asset pricing with index investing," LSE Research Online Documents on Economics 60739, London School of Economics and Political Science, LSE Library.
    11. Iraola, Miguel A. & Sepúlveda, Fabián & Torres-Martínez, Juan Pablo, 2019. "Financial segmentation and collateralized debt in infinite-horizon economies," Journal of Mathematical Economics, Elsevier, vol. 80(C), pages 56-69.
    12. Marco Cipriani & Ana Fostel & Daniel Houser, 2012. "Leverage and Asset Prices: An Experiment," Working Papers 1033, George Mason University, Interdisciplinary Center for Economic Science.
    13. Winfried Koeniger & Thomas Hintermaier, 2012. "Collateral constraints and macroeconomic volatility," 2012 Meeting Papers 390, Society for Economic Dynamics.

    More about this item

    Keywords

    collateral constraints; collateral premium; endogenous margins; heterogeneous agents; leverage;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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