Collateral requirements and asset prices

Johannes Brumm, Michael Grill, Felix Kubler, Karl H Schmedders*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

16 Scopus citations

Abstract

Many assets derive their value not only from future cash flows but also from their ability to serve as collateral. In this article, we investigate this collateral premium and its impact on asset returns in an infinite-horizon general equilibrium model with heterogeneous agents. 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.

Original languageEnglish (US)
Pages (from-to)1-25
Number of pages25
JournalInternational Economic Review
Volume56
Issue number1
DOIs
StatePublished - Feb 1 2015

ASJC Scopus subject areas

  • Economics and Econometrics

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