Equilibrium Asset Pricing with Systemic Risk

We provide an equilibrium multi-asset pricing model with microfounded systemic risk and heterogeneous investors. Systemic risk arises due to excessive leverage and risk taking induced by free-riding externalities. Global risksensitive financial regulations are introduced with a view of tackling syst...

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Bibliographic Details
Published in:Economic theory 2008-05, Vol.35 (2), p.293-319
Main Authors: Daníelsson, Jón, Zigrand, Jean-Pierre
Format: Article
Language:English
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Summary:We provide an equilibrium multi-asset pricing model with microfounded systemic risk and heterogeneous investors. Systemic risk arises due to excessive leverage and risk taking induced by free-riding externalities. Global risksensitive financial regulations are introduced with a view of tackling systemic risk, with Value-at-Risk a key component. The model suggests that risk- sensitive regulation can lower systemic risk in equilibrium, at the expense of poor risk-sharing, an increase in risk premia, higher and asymmetric asset volatility, lower liquidity, more comovement in prices, and the chance that markets may not clear.
ISSN:0938-2259
1432-0479
DOI:10.1007/s00199-007-0238-3