Crashes and Collateralized Lending / Jakub W. Jurek, Erik Stafford.

Format:

Book

Author/Creator:

Jurek, Jakub W.

Contributor:

National Bureau of Economic Research.

Stafford, Erik.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17422.

NBER working paper series no. w17422

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

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.

Notes:

Print version record

September 2011.