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Review of Financial Studies Vol. 33 No. 12 2020

The Collateralizability Premium

Hengjie Ai1; Jun E. Li2; Kai Li3; Christian Schlag4

1 Carlson School of Management, University of Minnesota · 2 Shanghai Advanced Institute of Finance , Shanghai Jiao Tong University, · 3 Hong Kong University of Science and Technology · 4 Goethe University Frankfurt and Leibniz Center for Financial Research SAFE

Abstract

A common prediction of macroeconomic models of credit market frictions is that the tightness of financial constraints is countercyclical. Theory suggests a negative collateralizability premium; that is, capital that can be used as collateral to relax financial constraints insures against aggregate shocks and commands a lower risk compensation compared with noncollateralizable assets. We show that a long-short portfolio constructed using a novel measure of asset collateralizability generates an average excess return of around 8% per year. We develop a general equilibrium model with heterogeneous firms and financial constraints to quantitatively account for the collateralizability premium.

DOI
10.1093/rfs/hhaa063
Volume
33
Issue
12
Pages
5821-5855
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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