NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Crashes and Collateralized Lending

Jakub W. Jurek, Erik Stafford

NBER Working Paper No. 17422
Issued in September 2011
NBER Program(s):Asset Pricing, Corporate Finance

This paper develops a parsimonious static model for characterizing financing terms in collateralized lending markets. We characterize the systematic risk exposures for a variety of securities and develop a simple indifference-pricing framework to value the systematic crash risk exposure of the collateral. We then apply Modigliani and Miller's (1958) Proposition Two (MM) to split the cost of bearing this risk between the borrower and lender, resulting in a schedule of haircuts and financing rates. The model produces comparative statics and time-series dynamics that are consistent with the empirical features of repo market data, including the dramatic change in financing terms for structured products during the credit crisis of 2007-2008.

download in pdf format
   (859 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w17422

Users who downloaded this paper also downloaded* these:
Jacobsen and van Benthem w19055 Vehicle Scrappage and Gasoline Policy
Findlay and O'Rourke Commodity Market Integration, 1500-2000
Bondt and Thaler w4777 Financial Decision-Making in Markets and Firms: A Behavioral Perspective
Acharya, Gale, and Yorulmazer w15674 Rollover Risk and Market Freezes
Benmelech and Dvir w17468 Does Short-Term Debt Increase Vulnerability to Crisis? Evidence from the East Asian Financial Crisis
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us