Crashes and collateralized lending
By: Jakub W. Jurek, Erik Stafford
Contributors: Stafford, Erik; National Bureau of Economic Research
Series: NBER working paper series -- working paper 17422; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17422.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "This paper develops a parsimonious static model for characterizing financing terms in collateralized lending markets.  We characterize the systematic risk exposures for a variety of securities and develop a simple indifference-pricing framework to value the systematic crash risk exposure of the collateral.  We then apply Modigliani and Miller's (1958) Proposition Two (MM) to split the cost of bearing this risk between the borrower and lender, resulting in a schedule of haircuts and financing rates.  The model produces comparative statics and time-series dynamics that are consistent with the empirical features of repo market data, including the dramatic change in financing terms for structured products during the credit crisis of 2007-2008"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 12/1/2011.

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