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University of Tübingen Working Papers in Economics and Finance >
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http://hdl.handle.net/10419/48629
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| Title: | | Risk and the role of collateral in debt renegotiation  |
| Authors: | | Neus, Werner Stadler, Manfred |
| Issue Date: | | 2011 |
| Series/Report no.: | | University of Tübingen working papers in economics and finance 16 |
| Abstract: | | In his basic model of debt renegotiation, BESTER [1994] argues that collateral is more effective if high risk projects are financed. This result, however, crucially depends on the definition of risk. Using the second-order stochastic dominance criterion introduced by ROTHSCHILD AND STIGLITZ [1970], we show that it is not a project's high risk, induced by a high probability of default, that makes collateral more effective. Instead it turns out that, given the expected return, the probability of default has no impact on the collateral's effectiveness. Moreover, a higher risk of the project caused by a higher loss given default makes the use of collateral even less effective. |
| Subjects: | | Debt renegotiation Collateral Risk Stochastic dominance |
| JEL: | | D81 D82 G21 G32 |
| Persistent Identifier of the first edition: | | urn:nbn:de:bsz:21-opus-57385 |
| Document Type: | | Working Paper |
| Appears in Collections: | | University of Tübingen Working Papers in Economics and Finance
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