The collateralizability premium
A common prediction of macroeconomic models of credit market frictions is that the tightness of financial constraints is countercyclical. As a result, theory implies a negative collateralizability premium; that is, capital that can be used as collateral to relax financial constraints provides insura...
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| Published in | IDEAS Working Paper Series from RePEc |
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| Main Authors | , , , |
| Format | Paper |
| Language | English |
| Published |
St. Louis
Federal Reserve Bank of St. Louis
01.01.2019
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| Online Access | Get full text |
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| Summary: | A common prediction of macroeconomic models of credit market frictions is that the tightness of financial constraints is countercyclical. As a result, theory implies a negative collateralizability premium; that is, capital that can be used as collateral to relax financial constraints provides insurance against aggregate shocks and commands a lower risk compensation compared with non-collateralizable assets. We show that a longshort portfolio constructed using a novel measure of asset collateralizability generates an average excess return of around 8% per year. We develop a general equilibrium model with heterogeneous firms and financial constraints to quantitatively account for the collateralizability premium. |
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