We study the effects of collateral constraints in an economy populated by investors with nonpledgeable labor incomes … production crises in the economy. Furthermore, stock prices have large collateral premiums over nonpledgeable incomes. We derive …

collateral to support arbitrage trades. We show that with volatile asset demands, arbitrage becomes risky. With information … frictions, a looser collateral policy might render the economy more vulnerable to extremely large demand shocks, while a tighter … collateral constraint helps maintain the stability at the cost of market liquidity supply …