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Debt financing in asset markets

Author(s): He, Zhiguo; Xiong, Wei

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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.
Publication Date: May-2012
Citation: He, Z and Xiong, W. (2012). Debt financing in asset markets. American Economic Review, 102 (3), 88 - 94. doi:10.1257/aer.102.3.88
DOI: doi:10.1257/aer.102.3.88
ISSN: 0002-8282
Pages: 88 - 94
Type of Material: Journal Article
Journal/Proceeding Title: American Economic Review
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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