Faculty of Economics and Business Administration Publications Database

The Collateralizability Premium

Ai, Hengjie
Li, Jun E
Li, Kai
Volume: 33
Number: 12
Pages: 5821 - 5855
Month: 12
ISSN-Print: 0893-9454
Link External Source: Online Version
Year: 2020

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.