The Collateralizability Premium

Hengjie Ai, Jun E. Li, Kai Li, Christian Schlag

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

A common prediction of macroeconomic models of credit market frictions is that the tightness of financial constraints is countercyclical. Theory suggests a negative collateralizability premium; that is, capital that can be used as collateral to relax financial constraints insures against aggregate shocks and commands a lower risk compensation compared with noncollateralizable assets. We show that a long-short portfolio constructed using a novel measure of asset collateralizability generates an average excess return of around 8% per year. We develop a general equilibrium model with heterogeneous firms and financial constraints to quantitatively account for the collateralizability premium.

Original languageEnglish (US)
Pages (from-to)5821-5855
Number of pages35
JournalReview of Financial Studies
Volume33
Issue number12
DOIs
StatePublished - Dec 1 2020

Bibliographical note

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© 2020 The Author(s) 2020.

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