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Single‐name Credit Risk, Portfolio Risk and Credit Rationing
Author(s) -
Arnold Lutz G.,
Reeder Johannes,
Trepl Stefanie
Publication year - 2014
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12075
Subject(s) - credit rationing , economics , adverse selection , portfolio , credit risk , welfare , rationing , interest rate , microeconomics , monetary economics , financial economics , actuarial science , market economy , health care , economic growth
In the Stiglitz–Weiss (1981) adverse selection model, pure credit rationing cannot arise in equilibrium. We show that this is due to the fact that single‐name risks are independent and a well‐diversified portfolio contains no risk. We introduce non‐diversifiable macroeconomic risk to the model and show that risk‐averse lenders possibly ration credit. Welfare analysis shows that an interest rate ceiling is potentially welfare enhancing and that equilibrium overinvestment can occur.