Debt Financing in Asset Markets
American Economic Review · 2012 · Volume 102 · Issue 3
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.
Keywords
Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Financial Markets and the Macroeconomy, Financial Crises, Banks, Other Depository Institutions, Micro Finance Institutions, Mortgages
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