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of Jaime Luque

Working Papers

Mortgage Default Risk Amplifies the Effect of Systemic Risk on Risk Premium

(2018)
Adilson Almeida
Marta Faias
Jaime Luque
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ABSTRACT

In this paper, we derive a Capital Asset Pricing Model (CAPM) formula from a general equilibrium model that allows agents to trade non-recourse mortgage debt in addition to risk free debt and risky equity. As in Geanakoplos and Zame (2014), borrowers must constitute collateral to obtain a mortgage loan, and effective mortgage payments are endogenous because default depends on the collateral value. Our main result is that binding collateral constraints (or, in terms of observables, a positive expected mortgage default rate) amplify the effect of a higher systematic risk on the risk premium of a portfolio with non-recourse mortgage debt.

KEYWORDS

CAPM; non-recourse mortgage debt; collateral; default

DISCIPLINES

Finance

PUBLICATION DATE

September, 2018

CITATION INFORMATION

Adilson Almeida, Marta Faias and Jaime Luque. "Mortgage Default Risk Amplifies the Effect of Systemic Risk on Risk Premium" (2018)
Available at: http://works.bepress.com/luque/35/

CREATIVE COMMONS LICENSE

Creative Commons License
Creative Commons License This work is licensed under a Creative Commons CC_BY-NC-ND International License.

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