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Liquidation Value and Loan Pricing

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  • FRANCESCA BARBIERO
  • GLENN SCHEPENS
  • JEAN‐DAVID SIGAUX

Abstract

This paper shows that the liquidation value of collateral depends on the interdependency between borrower and collateral risk. Using transaction‐level data on short‐term repurchase agreements (repo), we show that borrowers pay a premium of 1.1 to 2.6 basis points when their default risk is positively correlated with the risk of the collateral that they pledge. Moreover, we show that borrowers internalize this premium when making their collateral choices. Loan‐level credit registry data suggest that the results extend to the corporate loan market as well.

Suggested Citation

  • Francesca Barbiero & Glenn Schepens & Jean‐David Sigaux, 2024. "Liquidation Value and Loan Pricing," Journal of Finance, American Finance Association, vol. 79(1), pages 95-128, February.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:1:p:95-128
    DOI: 10.1111/jofi.13291
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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