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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Published in: | Economic theory 2008-05, Vol.35 (2), p.293-319 |
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Main Authors: | , |
Format: | Article |
Language: | English |
Subjects: | |
Citations: | Items that this one cites Items that cite this one |
Online Access: | Get full text |
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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. |
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ISSN: | 0938-2259 1432-0479 |
DOI: | 10.1007/s00199-007-0238-3 |