Giorgia Piacentino, Columbia Business School

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Gior­gia Pi­a­centino from Columbia Busi­ness School to present her re­search pa­per.
Per­sonal Webpage

Pa­per

Col­lat­eral Real­loc­a­tion

As­sets pledged as col­lat­eral for se­cured debt can­not be sold un­less the debt is paid or other­wise rene­go­ti­ated. We develop a model of this role of col­lat­er­al­iz­a­tion. We find that debt mar­ket fric­tions (alone) can cause the as­set mar­ket to fail. Asym­met­ric in­form­a­tion about debt val­ues frus­trates ef­fi­cient as­set sales des­pite per­fect in­form­a­tion about as­set val­ues and freedom to rene­go­ti­ate. Still, bor­row­ers is­sue se­cured debt in equi­lib­rium, but only as a last re­sort, when net worth is low, as in re­ces­sions. Our the­ory provides an ex­plan­a­tion of why se­cured bor­row­ing is coun­ter­cyc­lical and as­set real­loc­a­tion pro­cyc­lical.