Crashes and collateralized lending
By: Jakub W. Jurek, Erik Stafford
Contributors: Stafford, Erik; Harvard Business School
Edition: Rev.
Series: Working paper / Harvard Business School -- 11-025; Working paper (Harvard Business School) -- 11-025.
Publisher: Harvard Business School
Published: 2010
Place of publication: [Boston]
Language: eng
Number of pages: 28
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 credit crisis of 2007-2008.
Notes: "September 2010, revised September 2010"--Publisher's website.

"First draft: April 2010, This draft: July 2010"--added t.p.

Previously published as: Crashes, collateral, and the financing of securities.

Includes bibliographical references.