books

The Collateralizability Premium

forthcoming in Review of Financial Studies

Authors:
Hengije Ai,
Jun E. Li,
Kai Li,
Christian Schlag
Research Area:
Financial Markets
Date:
Feb 2020
Abstract:

A common prediction of macroeconomic models of credit market frictions is that the tightness of nancial constraints is countercyclical. As a result, theory implies a negative collateralizability premium; that is, capital that can be used as collateral to relax nancial 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 rms and nancial constraints to quantitatively account for

the collateralizability premium.

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