Collateral Constraints and the Law of One Price: An Experiment

Cipriani, Marco; Fostel, Ana; Houser, Daniel

doi:10.1111/jofi.12722

Cited by 16 publications

(11 citation statements)

References 41 publications

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“…Aqeel Akhtar, Fahad Ahmed Qureshi, Mubeen Butt In this scenario, the one who owned greater part of the asset will be lender and the shorter will be borrower (Punzi & Rabitsch, 2018). It is permissible because to collateralize an un-owned property with the consent of actual owner is allowed (Cipriani, Fostel, & Houser, 2018). Moreover, the debts against which collateral is going to be kept in the custody of lender by both parties are of different in nature, genre and classification or not (Ahiadorme et al, 2018).…”

Section: Contractual Parties Of Rahnmentioning

confidence: 99%

Laws of Collateral in Today's World in Islamic Perspective

Akhtar¹,

Qureshi

Butt³

2019

Shirkah

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Taking from Pakistan State Bank case, this article initially elaborates and critically discusses collateral (in conventional term) and Islamic collateral (rahn). In conventional banking, collateral traditionally refers to secured lending (also known as asset-based lending). Since possession is pre-requisite for binding of the contract, the charge can be registered in this regard to the regulating authority. Third party charge registration in this regard will not be entertained until the debtor scrutinizes it with registration. We argue that it is allowed for a creditor to take one asset as collateral from two debtors and this asset will be considered from both debtors as rahn. Since one single asset is considered from both debtors, the creditor may hold the asset until his whole debt would be paid off. Although this research happens in Pakistan, the case of collateral and rahn can be academic precedence in Islamic global world. Keywords: collateral, rahn, Pakistan state-banking

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Section: Contractual Parties Of Rahnmentioning

confidence: 99%

Laws of Collateral in Today's World in Islamic Perspective

Akhtar¹,

Qureshi

Butt³

2019

Shirkah

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“…The LOP principle not only provides the foundations of many theoretical models (such as Black and Scholes (1973)), but also the justification of investment strategies used in markets. 1 Violations of LOP are often observed, but there are different interpretations in the literature: one approach suggests that non-fundamental factors such as noise and sentiment (Lamont and Thaler (2003a)) are the causes for LOP violations, while another approach views price discrepancies as the result of structural differences in dimensions like liquidity or pledgeability (see for instance Garleanu and Pedersen (2011), Cipriani et al (2018), and also the literature on the "on-the-run" premium that we discuss below). To better understand the nature of LOP violations, it is useful to analyze how they are affected by changes in market regulations and policies.…”

Section: Introductionmentioning

confidence: 99%

Bond Lending and the Law of One Price in China's Treasury Markets

Magnani

Wang²

2020

SSRN Journal

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This paper examines how the introduction of bond lending in China's bond market has affected violations of the law of one price, measured by the yield spread between similar treasury bonds. To identify the effect of bond lending, we exploit the fact that in China identical bonds are traded on two segmented markets and bond lending has been introduced in only one of the two markets. We find that the introduction of bond lending has led to a decline in deviations from the law of one price. Consistent with an interpretation based on limits to arbitrage, a significant fraction of the deviations from the law of one price in our sample represent actual profit opportunities and the introduction of bond lending has reduced arbitrage profits.

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“…5 Recently, Cipriani et al (2012 and2018) have studied the asset-pricing implication of collateralized borrowing in a laboratory financial market: as predicted by the theoretical literature (see, for instance, Geanakoplos, 2008 andZame, 2014), leverage is priced and creates deviations from the Law of One Price. In contrast to our paper, in Cipriani et al (2012 and2018), leverage is exogenously set by the experimenter, there is only one type of collateral, and, by construction, default never occurs.…”

Section: Introductionmentioning

confidence: 99%

“…Note that the the marginal utility of money for Sellers at time 0 is given by µ S = 1, because in equilibrium they only hold riskless assets.2 Incidentally, as shown by Geanakoplos (2008, 2014) the liquidity value of the active contract in equilibrium equals the collateral value of the asset, LV B j=100 = CV B Y = 68.75. SeeCipriani et al (2018) for a study on the presence of collateral values in the lab.…”

mentioning

confidence: 99%

Endogenous Leverage and Default in the Laboratory

Cipriani

Fostel

Houser³

2019

SSRN Journal

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We study default and endogenous leverage in the laboratory. To this purpose, we develop a general equilibrium model of collateralized borrowing amenable to laboratory implementation and gather experimental data. In the model, leverage is endogenous: agents choose how much to borrow using a risky asset as collateral, and there are no ad hoc collateral constraints. When the risky asset is financial-namely, its payoff does not depend on ownership (such as a bond)collateral requirements are high and there is no default. In contrast, when the risky asset is nonfinancial-namely, its payoff depends on ownership (such as a firm)-collateral requirements are lower and default occurs. The experimental outcomes are in line with the theory's main predictions. The type of collateral, whether financial or not, matters. Default rates and loss from default are higher when the risky asset is nonfinancial, stemming from laxer collateral requirements. Default rates and collateral requirements move closer to the theoretical predictions as the experiment progresses.

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Collateral Constraints and the Law of One Price: An Experiment

Cited by 16 publications

References 41 publications

Laws of Collateral in Today's World in Islamic Perspective

Laws of Collateral in Today's World in Islamic Perspective

Bond Lending and the Law of One Price in China's Treasury Markets

Endogenous Leverage and Default in the Laboratory

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