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Equilibrium in collateralized asset markets: Credit contractions and negative equity loans

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  • Iraola, Miguel A.
  • Torres-Martínez, Juan Pablo

Abstract

We address a general equilibrium model with collateralized debt, credit contractions, and financial market segmentation. Restrictions on credit access make borrower’s optimal payment strategies–coupon payment, prepayment, and default–sensitive to idiosyncratic factors, even though the only payment enforcement is the seizure of collateral guarantees. We prove equilibrium existence, characterize optimal borrower’s payment strategies, and provide a numerical example illustrating our main results. A remarkable feature of our model is that it rationalizes the prevalence of negative equity non-recourse loans.

Suggested Citation

  • Iraola, Miguel A. & Torres-Martínez, Juan Pablo, 2014. "Equilibrium in collateralized asset markets: Credit contractions and negative equity loans," Journal of Mathematical Economics, Elsevier, vol. 55(C), pages 113-122.
    • Handle: RePEc:eee:mateco:v:55:y:2014:i:c:p:113-122
    DOI: 10.1016/j.jmateco.2014.10.006
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    Cited by:

    1. Jean-Marc Bonnisseau & Achis Chéry, 2023. "Continuity of marketable payoffs with re-trading," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(1), pages 31-53, January.
    2. Sebastián Cea-Echenique & Juan Pablo Torres-Martínez, 2018. "General equilibrium with endogenous trading constraints," PLOS ONE, Public Library of Science, vol. 13(9), pages 1-10, September.
    3. Cea-Echenique, Sebastián & Torres-Martínez, Juan Pablo, 2016. "Credit segmentation in general equilibrium," Journal of Mathematical Economics, Elsevier, vol. 62(C), pages 19-27.
    4. Iraola, Miguel A. & Sepúlveda, Fabián & Torres-Martínez, Juan Pablo, 2019. "Financial segmentation and collateralized debt in infinite-horizon economies," Journal of Mathematical Economics, Elsevier, vol. 80(C), pages 56-69.

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