Article
Equilibrium in collateralized asset markets: credit contractions and negative equity loans
Journal of Mathematical Economics
(2014)
Abstract
We address a general equilibrium model with collateralized debt, credit contractions, and financial market segmentation. Restrictions on credit access make borrower’s optimal payment strategies – coupon payment, prepayment, and default – sensitive to idiosyncratic factors, even though the only payment enforcement is the seizure of collateral guarantees. We prove equilibrium existence, characterize optimal borrower’s payment strategies, and provide a numerical example illustrating our main results. A remarkable feature of our model is that it rationalizes the prevalence of negative equity non-recourse loans.
Keywords
- Asset-backed securities,
- credit contractions,
- equilibrium existence
Disciplines
Publication Date
2014
Citation Information
Iraola, M., and J.P.Torres-Martínez (2014): "Equilibrium in collateralized asset markets: credit contractions and negative equity loans," Journal of Mathematical Economics, volume 55, pages 113-122.