Working Paper: CEPR ID: DP8000
Authors: Adam Ashcraft; Nicolae Garleanu; Lasse Heje Pedersen
Abstract: We study a production economy with multiple sectors financed by issuing securities to agents who face capital constraints. Binding capital constraints propagate business cycles, and a reduction of the interest rate can increase the required return of high-haircut assets since it can increase the shadow cost of capital for constrained agents. The required return can be lowered by easing funding constraints through lowering haircuts. To assess empirically the power of the haircut tool, we study the introduction of the legacy Term Asset-Backed Securities Loan Facility (TALF). By considering unpredictable rejections of bonds from TALF, we estimate that haircuts had a significant effect on prices. Further, unique survey evidence suggests that lowering haircuts could reduce required returns by more than 3% and provides broader evidence on the demand sensitivity to haircuts.
Keywords: asset pricing; financial frictions; haircuts; liquidity; macroeconomics; margin requirements; monetary policy
JEL Codes: E32; E44; E5; G01; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| binding capital constraints (G31) | increase required returns on high-haircut assets (G19) |
| increase required returns on high-haircut assets (G19) | reduce investment in these sectors (O16) |
| reduction in interest rates (E43) | decrease required returns on low-haircut assets (G19) |
| reduction in interest rates (E43) | increase required returns on high-haircut assets (G19) |
| lowering haircuts through lending facilities (G21) | decrease required returns (G19) |
| TALF program introduction (E43) | decline in yields for eligible securities (G12) |
| rejection of bonds from TALF program (E43) | increase in yield spreads (E43) |