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Divergent risk-attitudes and endogenous collateral constraints

Author

Listed:
  • Curatola, Giuliano
  • Faia, Ester

Abstract

Financial crises are anticipated by leverage build-up and asset price booms and followed by sharp de-leveraging and asset price burst. Leverage pro-cyclicality, debt margins counter-cyclicality and heightened asset price volatility are often hard to reconcile with credit frictions models, with and without occasionally binding constraints. We show that a model in which the anticipatory effects of occasionally binding collateral constraints interact with borrowers' time-varying risk-attitudes (modeled through gain-loss reference dependent utilities) and with borrowers/lenders risk-attitudes heterogeneity can explain those facts. Simulations through global methods show that the model can also match numerous statistics characterizing the asset price and leverage cycles.

Suggested Citation

  • Curatola, Giuliano & Faia, Ester, 2021. "Divergent risk-attitudes and endogenous collateral constraints," Journal of Economic Theory, Elsevier, vol. 192(C).
    • Handle: RePEc:eee:jetheo:v:192:y:2021:i:c:s002205312030168x
    DOI: 10.1016/j.jet.2020.105175
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    Cited by:

    1. Li, Meng, 2023. "Loss aversion and inefficient general equilibrium over the business cycle," Economic Modelling, Elsevier, vol. 118(C).

    More about this item

    Keywords

    Loss averse borrowers; Risk-tolerance; Endogenous debt margins; Leverage cycle; Occasionally binding constraints;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G01 - Financial Economics - - General - - - Financial Crises

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