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Collateral constraints and asset prices

Author

Listed:
  • Chabakauri, Georgy
  • Han, Brandon

Abstract

We study the effects of collateral constraints in an economy populated by investors with nonpledgeable labor incomes and heterogeneous preferences and beliefs. We show that these constraints inflate stock prices, generate spikes and crashes in price-dividend ratios and volatilities, clustering of volatilities, and leverage cycles. They also lead to substantial decreases in interest rates and increases in Sharpe ratios when investors are anxious about hitting constraints due to production crises in the economy. Furthermore, stock prices have large collateral premiums over nonpledgeable incomes. We derive asset prices and stationary distributions of the investors' consumption shares in closed form.

Suggested Citation

  • Chabakauri, Georgy & Han, Brandon, 2017. "Collateral constraints and asset prices," LSE Research Online Documents on Economics 118955, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:118955
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    File URL: http://eprints.lse.ac.uk/118955/
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    More about this item

    Keywords

    collateral; nonpledgeable labor income; hterogeneous preferences; disagreement; asset prices; stationary equilibrium;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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