Crashes and Collateralized Lending /
Jurek, Jakub W.
Crashes and Collateralized Lending / Jakub W. Jurek, Erik Stafford. - Cambridge, Mass. National Bureau of Economic Research 2011. - 1 online resource: illustrations (black and white); - NBER working paper series no. w17422 . - Working Paper Series (National Bureau of Economic Research) no. w17422. .
September 2011.
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.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.
Crashes and Collateralized Lending / Jakub W. Jurek, Erik Stafford. - Cambridge, Mass. National Bureau of Economic Research 2011. - 1 online resource: illustrations (black and white); - NBER working paper series no. w17422 . - Working Paper Series (National Bureau of Economic Research) no. w17422. .
September 2011.
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.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.