Endogenous collateral

Aloisio Araujo, José Fajardo, Mario R. Páscoa

Research output: Contribution to journalArticlepeer-review

18 Citations (Scopus)

Abstract

We study an economy where there are two types of assets. Consumers' promises are the primitive defaultable assets secured by collateral chosen by the consumers themselves. These personalized assets are purchased by financial intermediaries who finance these purchases by selling back derivatives to consumers. We show that non-arbitrage prices of primitive assets are strict submartingales, whereas non-arbitrage prices of derivatives are supermartingales. Next we establish existence of equilibrium, without imposing bounds on short-sales. The nonconvexity of the budget set is overcome by considering a continuum of agents.

Original languageEnglish
Pages (from-to)439-462
Number of pages24
JournalJournal of Mathematical Economics
Volume41
Issue number4-5 SPEC. ISS.
DOIs
Publication statusPublished - Aug 2005

Keywords

  • Endogenous collateral
  • Non-arbitrage

Fingerprint Dive into the research topics of 'Endogenous collateral'. Together they form a unique fingerprint.

Cite this