Debt Financing in Asset Markets
AbstractWe study rollover risk and collateral value in a dynamic asset pricing model with endogenous debt financing by extending the framework of Geanakoplos (2009) with a generic binomial tree and time-varying heterogeneous beliefs. Optimistic borrowers face rollover risk if the belief dispersion between the borrowers and the pessimistic lenders widens after interim bad news. We demonstrate the optimality of the maximum riskless short-term debt financing for optimistic borrowers even in the presence of the rollover risk. We also highlight the role of interim trading which, by allowing creditors to sell seized collateral to other optimists with saved cashes, boosts the asset's collateral value and equilibrium price.
CitationHe, Zhiguo, and Wei Xiong. 2012. "Debt Financing in Asset Markets." American Economic Review, 102 (3): 88-94. DOI: 10.1257/aer.102.3.88
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises
- G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages