NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Debt Financing in Asset Markets

Zhiguo He, Wei Xiong

NBER Working Paper No. 17935
Issued in March 2012
NBER Program(s):   AP   CF

We 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.

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Document Object Identifier (DOI): 10.3386/w17935

Published: Zhiguo He & Wei Xiong, 2012. "Debt Financing in Asset Markets," American Economic Review, American Economic Association, vol. 102(3), pages 88-94, May. citation courtesy of

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