Debt collateralization, capital structure, and maximal leverage

Gong, Feixue; Phelan, Gregory

doi:10.1007/s00199-019-01222-7

Cited by 16 publications

(23 citation statements)

References 43 publications

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“…With tranching we proved that any investor buying an asset will use it to issue the maximum number of tranches. When contracts can be used as collateral, any investor buying an asset will use it to issue contracts that can be used as collateral for further promises, which generalizes a similar result found in Gong and Phelan (2019).…”

Section: Theoretical Resultssupporting

confidence: 66%

“…Our paper relates to the literature on collateral equilibria in models with multiple states (see Simsek, 2013;Toda, 2015;Gottardi and Kubler, 2015;Phelan, 2015;Gong and Phelan, 2019;Phelan and Toda, 2019). Araujo et al (2012) examine the effects of default and collateral on risk sharing.…”

Section: Related Literaturementioning

confidence: 99%

“…As we will discuss, there is an essential equivalence between tranching and pyramiding when promises can be any contingent promise. But when promises are restricted to a limited set of contingencies (for example debt), pyramiding can be used to create contingencies otherwise unavailable (see Gong and Phelan, 2019, for an analysis of the state-contingencies created via pyramiding).…”

Section: Contracts and Pyramidingmentioning

confidence: 99%

“…This contract promises a noncontingent payment ( , , ) backed by the risky debt j M acting as collateral. The restriction to j M is without loss of generality; we could let any contract j ∈ J Y serve as collateral, but in equilibrium only j M will be traded and thus only j M will serve as collateral (Gong and Phelan, 2019). The…”

Section: Financial Contracts and Collateralmentioning

confidence: 99%

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Collateral Constraints, Tranching, and Price Bases

Gong¹,

Phelan²

2020

Preprint

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Tranching an asset increases its basis; tranching a CDS, as occurs with the CDX index, increases the basis on the underlying asset. We consider a general equilibrium model with collateralized financial promises and multiple states of uncertainty to study how allowing an asset to back multiple financial contracts (i.e., tranching) affects price bases. A positive basis emerges when risky assets and their derivative contracts can be used as collateral for financial promises. We provide an empirical test of our theory using inclusion in the CDX and find that inclusion in the CDX increases the CDS basis.

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Section: Theoretical Resultssupporting

confidence: 66%

Section: Related Literaturementioning

confidence: 99%

Section: Contracts and Pyramidingmentioning

confidence: 99%

Section: Financial Contracts and Collateralmentioning

confidence: 99%

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Collateral Constraints, Tranching, and Price Bases

Gong¹,

Phelan²

2020

Preprint

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“…10 Senior-subordinated tranches implicitly provide investors the ability to use the underlying bonds as collateral. See Gong and Phelan (2016b) for more detail. 11 As additional supporting evidence, Maggiori, Neiman and Schreger (2017) show that foreign mutual funds demonstrate a "home currency bias," holding low levels of corporate bonds denominated in foreign currency-except when the currency is the dollar.…”

Section: Absmentioning

confidence: 99%

Global Collateral and Capital Flows

2019

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Cross-border financial flows arise when (otherwise identical) countries differ in their abilities to use assets as collateral to back financial contracts. Financially integrated countries have access to the same set of financial instruments, and yet there is no price convergence of assets with identical payoffs, due to a gap in collateral values. Home (financially advanced) runs a current account deficit. Financial flows amplify asset price volatility in both countries, and gross flows driven by collateral differences collapse following bad news about fundamentals. Our results can explain financial flows among rich, similarly-developed countries, and why these flows increase volatility.Recent decades have exhibited a proliferation of financial innovation and dramatic increases in gross international financial flows among financially developed countries. Economists have tended to focus on flows between developed and emerging economies, but gross flows among developed economies are substantial. 1 If these flows were primarily driven by diversification motives, then one would expect capital flows to dampen shocks and decrease volatility. However, there is ample evidence that financial integration increases volatility and amplifies shocks, suggesting that the nature of these flows are at least in part driven by other motives. We show that cross-border differences in the ability to collateralize financial promises are enough to generate international capital flows because international financial trade is a way of sharing scarce collateral. Critically, these flows amplify global volatility in asset prices and collapse during crises. Motivating evidenceThe following empirical observations motivate our analysis.Observation 1: There are substantial gross financial flows between rich countries with similar levels of financial development. These gross financial flows (countries simultaneously buying and selling foreign and domestic assets) are an order of magnitude larger than net trade in assets. In some cases these offsetting flows are heavily concentrated in financial assets and in particular in securitized mortgage securities. First, among developed countries there are substantial foreign holdings of government bonds, and for many countries non-residents make up the largest investor base (Andritzky, 2012). Second, there are substantial gross flows between the U.S. and Europe (see Shin, 2012;Bertaut et al., 2012). These flows were most striking pre-crisis, and while they have partially reversed post-crisis (as did all gross flows), the patterns remain. 2 Finally, as documented by Hale and Obstfeld (2016), there are substantial gross flows within Europe, and these flows are concentrated in just a few countries: Germany, Belgium, and France stand out among the 1 See for example Bruno and Shin (2014), who discuss implications for intermediation costs. 2 See BIS locational banking statistics.

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Audit Committee Financial Expertise, Tenure, and Capital Structure Decisions, Evidence from Turkey

Özer

Merter²

2023

Springer Proceedings in Business and Economics

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Debt collateralization, capital structure, and maximal leverage

Cited by 16 publications

References 43 publications

Collateral Constraints, Tranching, and Price Bases

Collateral Constraints, Tranching, and Price Bases

Global Collateral and Capital Flows

Audit Committee Financial Expertise, Tenure, and Capital Structure Decisions, Evidence from Turkey

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