TY  - JOUR
AU  - Jurek,Jakub W.
AU  - Stafford,Erik
TI  - Crashes and Collateralized Lending
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17422
PY  - 2011
Y2  - September 2011
UR  - http://www.nber.org/papers/w17422
L1  - http://www.nber.org/papers/w17422.pdf
N1  - Author contact info:
Jakub W. Jurek
Princeton University
Bendheim Center for Finance 211
26 Prospect Avenue
Princeton, NJ 08540
Tel: 609/258-4037
Fax: 609/258-0771
E-Mail: jjurek@princeton.edu

Erik Stafford
Graduate School of Business
Harvard University
Baker 371
Boston, MA 02163
Tel: 617/495-8064
E-Mail: estafford@hbs.edu
AB  - 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.
ER  -