Using assets as collateral increases volatility of returns, Buba paper finds
Using a model with two agents facing collateral constraints for borrowing, a Bundesbank discussion paper shows that borrowing against collateral makes the return on those assets significantly more volatile.
"In our calibration of the model there are two types of agents who differ with respect to their risk aversion," Johannes Brumm, Felix Kubler, Michael Grill and Karl Schmedders write in Collateral requirements and asset prices.
The authors add: "The agent with the low risk aversion is the
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