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Full-Text Articles in Social and Behavioral Sciences
Leverage And Default In Binomial Economies: A Complete Characterization, Ana Fostel, John Geanakoplos
Leverage And Default In Binomial Economies: A Complete Characterization, Ana Fostel, John Geanakoplos
Cowles Foundation Discussion Papers
Our paper provides a complete characterization of leverage and default in binomial economies with financial assets serving as collateral. Our Binomial No-Default Theorem states that any equilibrium is equivalent (in real allocations and prices) to another equilibrium in which there is no default. Thus actual default is irrelevant, though the potential for default drives the equilibrium and limits borrowing. This result is valid with arbitrary preferences and endowments, contingent or non-contingent promises, many assets and consumption goods, production, and multiple periods. We also show that no-default equilibria would be selected if there were the slightest cost of using collateral or …
Endogenous Leverage In A Binomial Economy: The Irrelevance Of Actual Default, Ana Fostel, John Geanakoplos
Endogenous Leverage In A Binomial Economy: The Irrelevance Of Actual Default, Ana Fostel, John Geanakoplos
Cowles Foundation Discussion Papers
We show that binomial economies with financial assets are an informative and tractable model to study endogenous leverage and collateral equilibrium: endogenous leverage can be highly volatile, but it is always easy to compute. The possibility of default can have a dramatic effect on equilibrium, if collateral is scarce, yet we prove the No-Default Theorem asserting that, without loss of generality, there is no default in equilibrium. Thus potential default has a dramatic effect on equilibrium, but actual default does not. This result is valid with arbitrary preferences, contingent promises, many assets and consumption goods, production, and multiple periods. On …
Leverage And Default In Binomial Economies: A Complete Characterization, Ana Fostel, John Geanakoplos
Leverage And Default In Binomial Economies: A Complete Characterization, Ana Fostel, John Geanakoplos
Cowles Foundation Discussion Papers
Our paper provides a complete characterization of leverage and default in binomial economies with financial assets serving as collateral. First, our Binomial No-Default Theorem states that any equilibrium is equivalent (in real allocations and prices) to another equilibrium in which there is no default. Thus actual default is irrelevant, though the potential for default drives the equilibrium and limits borrowing. This result is valid with arbitrary preferences and endowments, arbitrary promises, many assets and consumption goods, production, and multiple periods. We also show that the no-default equilibrium would be selected if there were the slightest cost of using collateral or …
Leverage And Default In Binomial Economies: A Complete Characterization, Ana Fostel, John Geanakoplos
Leverage And Default In Binomial Economies: A Complete Characterization, Ana Fostel, John Geanakoplos
Cowles Foundation Discussion Papers
Our paper provides a complete characterization of leverage and default in binomial economies with financial assets serving as collateral. Our Binomial No-Default Theorem states that any equilibrium is equivalent (in real allocations and prices) to another equilibrium in which there is no default. Thus actual default is irrelevant, though the potential for default drives the equilibrium and limits borrowing. This result is valid with arbitrary preferences and endowments, contingent or non-contingent promises, many assets and consumption goods, production, and multiple periods. We also show that no-default equilibria would be selected if there were the slightest cost of using collateral or …