Preprint A285/2004
Endogenous Collateral
Mario R. Páscoa | Araujo, Aloisio | Barbachan, José Fajardo
Keywords: Endogenous Collateral; Non Arbitrage.
We study an economy where there are two types of assets. Consumers' promises are the primitive defautable assets secured by collateral chosen by the consumers themselves. The purchase of these personalized assets by financial intermediaries is financed by selling back derivatives to consumers. We show that nonarbitrage prices of primitive assets are strict submartingales, whereas nonarbitrage prices of derivatives are supermartingales. Next we establish existence of equilibrium, without imposing bounds on short sales. The nonconvexity of the budget set is overcome by considering a continuum of agents.