Collateral constraints and asset prices

Chabakauri, Georgy ORCID: 0009-0002-7980-269X and Han, Brandon (2017) Collateral constraints and asset prices. Financial Markets Group Discussion Papers (776). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We study the effects of collateral constraints in an economy populated by investors with nonpledgeable labor incomes and heterogeneous preferences and beliefs. We show that these constraints inflate stock prices, generate spikes and crashes in price-dividend ratios and volatilities, clustering of volatilities, and leverage cycles. They also lead to substantial decreases in interest rates and increases in Sharpe ratios when investors are anxious about hitting constraints due to production crises in the economy. Furthermore, stock prices have large collateral premiums over nonpledgeable incomes. We derive asset prices and stationary distributions of the investors' consumption shares in closed form.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2017 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited:	31 May 2023 14:12
Last Modified:	01 Oct 2024 03:20
URI:	http://eprints.lse.ac.uk/id/eprint/118955

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