Equilibrium With Default and Endogenous Collateral

Araújo, Aloísio; Orrillo, Jaime; Páscoa, Mário Rui

http://hdl.handle.net/10362/89040

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Autores

Araújo, Aloísio

Orrillo, Jaime

Páscoa, Mário Rui

Resumo(s)

We study a two-period general equilibrium model with incomplete asset markets and default. We make collateral endogenous by allowing each seller of assets to fix the level of collateral. Sellers are required to provide collateral whose first-period value, per unit of asset, exceeds the asset price, by an arbitrarily small amount. Moreover, borrowers are also required to be fully covered by the purchase, in the first-period, of state by state default insurance. These insurance contracts are offered by lenders. The insurance cost or revenue is a linear charge and plays the role of a spread penalizing borrowers who will incur in default and benefiting lenders who will suffer default. Under these assumptions, equilibrium always exists.

Palavras-chave

Incomplete Markets Collateral Default Insurance Spread

URI

http://hdl.handle.net/10362/89040

Citação

Araújo, Aloisio, Orrillo, Jaime and Páscoa, Mario R., Equilibrium With Default and Endogenous Collateral (1999). FEUNL Working Paper Series No. 339

Editora

Nova SBE

Coleções

NSBE - Working Paper Series

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