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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
Marta Faias
Jaime Luque
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 This work is licensed under a Creative Commons CC_BY-NC-ND International License.