Journal of Finance Vol. 79 No. 1 2024

Liquidation Value and Loan Pricing

Francesca Barbiero¹; Glenn Schepens¹; Jean-David Sigaux^2,1,3,4,5,6

¹ European Central Bank · ² Ericsson (Sweden) · ³ TD Bank · ⁴ Sankt Hans Hospital · ⁵ Central Philippine University · ⁶ Marymount University

Abstract

This paper shows that the liquidation value of collateral depends on the interdependency between borrower and collateral risk. Using transaction‐level data on short‐term repurchase agreements (repo), we show that borrowers pay a premium of 1.1 to 2.6 basis points when their default risk is positively correlated with the risk of the collateral that they pledge. Moreover, we show that borrowers internalize this premium when making their collateral choices. Loan‐level credit registry data suggest that the results extend to the corporate loan market as well.

DOI

10.1111/jofi.13291

Volume

79

Issue

1

Pages

95-128

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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