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Unformatted text preview: s uncertainty
averse, or more optimistic about returns on the particular assets.
Leverage may also be constrained for any of a variety of reasons. The recent
literature has emphasized two broad types of constraints. On one hand, there may
be a limit on the size of the losses that the intermediary would be subject to in
bad states of the world, relative to its capital; such limits may result from regulatory
tory capital requirements, or (the case of greatest relevance in the recent crisis)
such limits may be imposed by the intermediary’s creditors, who are unwilling to
supply additional funding if the leverage constraint is exceeded (as in Zigrand,
Shin, and Danielsson, 2010; Adrian, Moench, and Shin, 2010b; Adrian and Shin,
forthcoming b; Beaudry and Lahiri, 2010).6
Alternatively, intermediaries may raise funds by pledging particular assets as
collateral for individual loans, and the amount that they can borrow may be limited
by the value of available collateral. Gârleanu and Pedersen (2010) and Ashcraft,
Gârleanu, and Pedersen (forthcoming) consider the consequences of collateral
constraints in a model where the fraction of each asset’s value that...
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