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- Title
Collateralized borrowing and increasing risk.
- Authors
Phelan, Gregory
- Abstract
This paper uses a general equilibrium model with collateralized borrowing to show that increases in risk can have ambiguous effects on leverage, loan margins, loan amounts, and asset prices. Increasing risk about future payoffs and endowments can lead to riskier loans with larger balances and lower spreads even when lenders are risk averse and borrowers can default. As well, increasing the covariance of either agents' endowments with the asset payoff can have ambiguous consequences for equilibrium. Though the effects are ambiguous, key determinants of how increased risk translates into changes in prices and allocations are the covariance of agents' endowments with the asset payoff, agents' risk aversion, and the location of increased risk in the distribution of future states. Some restricted changes in the borrower's or lender's endowments can have unambiguous but asymmetric effects on equilibrium.
- Subjects
FINANCIAL leverage; ANALYSIS of covariance; DISTRIBUTION (Probability theory); MONEYLENDERS; ENDOWMENT effect (Economics); ECONOMIC equilibrium
- Publication
Economic Theory, 2017, Vol 63, Issue 2, p471
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-015-0943-2