American Economic Review Vol. 102 No. 3 2012

Debt Financing in Asset Markets

Zhiguo He¹; Wei Xiong²

¹ Booth School of Business, University of Chicago · ² Department of Economics Princeton University

Abstract

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.

DOI

10.1257/aer.102.3.88

Volume

102

Issue

3

Pages

88-94

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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