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Endogenous Collateral

Author

Listed:
  • Mário Páscoa
  • Aloisio Araujo
  • José Fajardo

Abstract

We study an economy where there are two types of assets. Consumers' promises are the primitive defaultable assets secured by collateral chosen by the consumers themselves. The purchase of these personalized assets by ¯- nancial intermediaries is ¯nanced by selling back derivatives to consumers. We show that nonarbitrage prices of primitive assets are strict submartin- gales, whereas nonarbitrage prices of derivatives are supermartingales. Next we establish existence of equilibrium, without imposing bounds on short sales. The nonconvexity of the budget set is overcome by considering a continuum of agents

Suggested Citation

  • Mário Páscoa & Aloisio Araujo & José Fajardo, 2004. "Endogenous Collateral," Econometric Society 2004 Latin American Meetings 161, Econometric Society.
    • Handle: RePEc:ecm:latm04:161
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    References listed on IDEAS

    as
    1. Aloisio Araújo & Jaime Orrillo & Mario R. Páscoa, 2000. "Equilibrium with Default and Endogenous Collateral," Mathematical Finance, Wiley Blackwell, vol. 10(1), pages 1-21, January.
    2. Aloisio Araujo & Mário Rui Páscoa & Juan Pablo Torres-Martínez, 2002. "Collateral Avoids Ponzi Schemes in Incomplete Markets," Econometrica, Econometric Society, vol. 70(4), pages 1613-1638, July.
    3. Araujo, Aloisio & Fajardo, Jose & Pascoa, Mario R., 2005. "Endogenous collateral," Journal of Mathematical Economics, Elsevier, vol. 41(4-5), pages 439-462, August.
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    6. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
    7. Fajardo, Jose, 2005. "A note on arbitrage and exogenous collateral," Mathematical Social Sciences, Elsevier, vol. 50(3), pages 336-341, November.
    8. Mariano Steinert & Juan Pablo Torres-Martínez, 2004. "General equilibrium existence with asset-backed securitization," Textos para discussão 490, Department of Economics PUC-Rio (Brazil).
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    More about this item

    Keywords

    Endogenous collateral;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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