Weerachart Tee Kilenthong
Assistant Professor
University of California, Santa Barbara
Working Papers
Endogenous Valuation of Collateral and Ex Ante Trade in Market Fundamentals, Joint with Robert M. Townsend
Abstract:This paper studies a competitive general equilibrium model with default and endogenous collateral constraints. Even though all collateralized contracts are allowed, the possibility of trade in spot markets creates externalities as spot prices and the bindingness of collateral constraints interact. We show that if agents are allowed to contract ex ante on market fundamentals determining the state-contingent spot price, over and above contracting on true underlying states of the world, then competitive equilibria with endogenous collateral constraints are equivalent with Pareto optima. Examples show that it is possible to have multiple market fundamentals in equilibrium.
Collateral Premia and Risk Sharing under Limited Commitment (This Version November 27, 2006)
Abstract: A competitive general equilibrium model with complete collateralized contracts under limited commitment is proposed and analyzed. With limited aggregate collateral, risk sharing is imperfect. There exists a minimal spanning set of finite collateralized contracts that generates the feasible space and that contains more than the complete set of collateralized Arrow securities. I prove that constrained optimal allocations can be decentralized as a general equilibrium with collateral constraints, and vice versa. Because a capital good serves as collateral, it has an additional value, called collateral premium. The collateral premium is zero if and only if risk sharing is perfect. This is a testable implication of the model.
Computing a Collateral Model using Nonlinear Programming (This is a computational note for "Collateral Premia and Risk Sharing under Limited Commitment ")
Abstract: This note presents a computational algorithm for the Pareto program of the collateral model in Kilenthong (2006). This is a nonlinear programming problem. This program can be used to solve the collateral model with multiple capital goods. Some of the capital goods could be collateralizable. Simple example and Matlab code are provided for illustration. The ``Kronecker'' product formulation improves computational efficiency.
Tranching and Pooling as Financial Innovations (Updating and Coming Soon)
Abstract: This paper proposes a simple and tractable competitive equilibrium model with tranching mechanism, under which an agent can pledge a pool of collateral for several contracts concurrently. This equilibrium notion is equivalent to a competitive equilibrium with intermediation that is performing pooling and tranching functions. The first and second welfare theorems are proved. The welfare effect of the tranching mechanism is examined in comparison with a collateral model with contract-specific collateralization. A good has an additional value, called collateral premium, due to its use as collateral. Similar to the collateral model, this model also delivers that the collateral premium is equal to zero if and only if risk sharing is complete.
Coruses
Fall 2007
Winter 2008
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