The Collateralizability Premium

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.