Financial crises are anticipated by leverage build-up and asset price booms and followed by sharp de-leveraging and asset price burst. Leverage pro-cyclicality, debt margins counter-cyclicality and heightened asset price volatility are often hard to reconcile with credit frictions models, with and without occasionally binding constraints. We show that a model in which the anticipatory effects of occasionally binding collat-eral constraints interact with borrowers’ time-varying risk-attitudes (modeled through gain-loss reference dependent utilities) and with borrowers/lenders risk-attitudes heterogeneity can explain those facts. Simu-lations through global methods show that the model can also match numerous statistics characterizing the asset price and leverage cycles.
Curatola, G., Faia, E. (2021). Divergent risk-attitudes and endogenous collateral constraints. JOURNAL OF ECONOMIC THEORY, 192 [10.1016/j.jet.2020.105175].
Divergent risk-attitudes and endogenous collateral constraints
Curatola, Giuliano;
2021-01-01
Abstract
Financial crises are anticipated by leverage build-up and asset price booms and followed by sharp de-leveraging and asset price burst. Leverage pro-cyclicality, debt margins counter-cyclicality and heightened asset price volatility are often hard to reconcile with credit frictions models, with and without occasionally binding constraints. We show that a model in which the anticipatory effects of occasionally binding collat-eral constraints interact with borrowers’ time-varying risk-attitudes (modeled through gain-loss reference dependent utilities) and with borrowers/lenders risk-attitudes heterogeneity can explain those facts. Simu-lations through global methods show that the model can also match numerous statistics characterizing the asset price and leverage cycles.File | Dimensione | Formato | |
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https://hdl.handle.net/11365/1126009