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Risk and liquidity in a system context

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  • Shin, Hyun Song
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    Abstract

    This paper explores the pricing of debt in a financial system where the assets that borrowers hold to meet their obligations include claims against other borrowers. Assessing financial claims in a system context captures features that are missing in a partial equilibrium setting, such as liquidity spillovers across financial institutions resulting from expansions and contractions of balance sheets. Aggregate liquidity can be seen as the rate of growth of financial sector balance sheets.

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    File URL: http://www.sciencedirect.com/science/article/B6WJD-4S0YXNH-1/2/897ea349a30da9b9c729d24032764b8b
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Intermediation.

    Volume (Year): 17 (2008)
    Issue (Month): 3 (July)
    Pages: 315-329

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    Handle: RePEc:eee:jfinin:v:17:y:2008:i:3:p:315-329

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    Web page: http://www.elsevier.com/locate/inca/622875

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    References

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    1. Stephen Morris & Hyun Song Shin, 2003. "Liquidity Black Holes," Cowles Foundation Discussion Papers 1434, Cowles Foundation for Research in Economics, Yale University.
    2. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Brunnermeier, Markus K & Pedersen, Lasse Heje, 2004. "Predatory Trading," CEPR Discussion Papers 4639, C.E.P.R. Discussion Papers.
    4. Franklin Allen & Douglas Gale, 2004. "Financial Intermediaries and Markets," Econometrica, Econometric Society, vol. 72(4), pages 1023-1061, 07.
    5. Guillaume Plantin & Haresh Sapra & Hyun Song Shin, 2008. "Marking-to-Market: Panacea or Pandora's Box?," Journal of Accounting Research, Wiley Blackwell, vol. 46(2), pages 435-460, 05.
    6. Rodrigo Cifuentes & Gianluigi Ferrucci & Hyun Song Shin, 2005. "Liquidity risk and contagion," Bank of England working papers 264, Bank of England.
    7. Viral V. Acharya & Lasse Heje Pedersen, 2004. "Asset Pricing with Liquidity Risk," NBER Working Papers 10814, National Bureau of Economic Research, Inc.
    8. Douglas W. Diamond & Raghuram G. Rajan, 2002. "Liquidity Shortages and Banking Crises," NBER Working Papers 8937, National Bureau of Economic Research, Inc.
    9. Raghuram G. Rajan, 2005. "Has Financial Development Made the World Riskier?," Working Papers id:248, eSocialSciences.
    10. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    11. Ben S. Bernanke & Alan S. Blinder, 1989. "Credit, Money, and Aggregate Demand," NBER Working Papers 2534, National Bureau of Economic Research, Inc.
    12. Milgrom, Paul & Roberts, John, 1994. "Comparing Equilibria," American Economic Review, American Economic Association, vol. 84(3), pages 441-59, June.
    13. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
    14. Michael Boss & Martin Summer & Stefan Thurner, 2004. "Contagion Flow Through Banking Networks," Papers cond-mat/0403167, arXiv.org.
    15. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    16. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
    17. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 556-566, 04/05.
    18. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October.
    19. Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers 512, Society for Economic Dynamics.
    20. Isabel Schnabel & Hyun Song Shin, 2004. "Liquidity and Contagion: The Crisis of 1763," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 929-968, December.
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    Citations

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    Cited by:
    1. Riccetti, Luca & Russo, Alberto & Gallegati, Mauro, 2013. "Leveraged network-based financial accelerator," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1626-1640.
    2. Vanini, Paolo, 2012. "Fiancial Innovation, Structuring and Risk Transfer," MPRA Paper 42536, University Library of Munich, Germany.
    3. Paolo Tasca & Stefano Battiston, . "Diversification and Financial Stability," Working Papers CCSS-11-001, ETH Zurich, Chair of Systems Design.
    4. Bargigli, Leonardo & Gallegati, Mauro, 2011. "Random digraphs with given expected degree sequences: A model for economic networks," Journal of Economic Behavior & Organization, Elsevier, vol. 78(3), pages 396-411, May.
    5. Stefano Battiston & Domenico Delli Gatti & Mauro Gallegati & Bruce C. Greenwald & Joseph E. Stiglitz, 2009. "Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk," NBER Working Papers 15611, National Bureau of Economic Research, Inc.
    6. Prasanna Gai & Sujit Kapadia, 2009. "A Network Model of Super-systemic Crises," Working Papers Central Bank of Chile 542, Central Bank of Chile.
    7. Tasca, Paolo & Battiston, Stefano, 2013. "Market Procyclicality and Systemic Risk," MPRA Paper 45156, University Library of Munich, Germany, revised Mar 2013.
    8. Coudert, Virginie & Gex, Mathieu, 2010. "Contagion inside the credit default swaps market: The case of the GM and Ford crisis in 2005," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(2), pages 109-134, April.
    9. Stefano Battiston & Domenico Delli Gatti & Mauro Gallegati & Bruce Greenwald & Joseph E. Stiglitz, . "Default Cascades: When Does Risk Diversification Increase Stability?," Working Papers ETH-RC-11-006, ETH Zurich, Chair of Systems Design.
    10. Giovanni Majnoni & Andrew Powell, 2011. "On Endogenous Risk, the Amplification Effects of Financial Systems and Macro Prudential Policies," Research Department Publications 4726, Inter-American Development Bank, Research Department.
    11. Gabrielle Demange, 2012. "Contagion in financial networks: a threat index," Working Papers halshs-00662513, HAL.
    12. Masazumi Hattori & Kazuhiko Ohashi, 2009. "Incentives to Issue Low-Quality Securitized Products in the OTD Business Model," IMES Discussion Paper Series 09-E-26, Institute for Monetary and Economic Studies, Bank of Japan.
    13. Miroslav Plasil & Ivana Kubicova, 2012. "Contingent Claims Analysis And The Inter-Sector Transmission Of Credit Risk," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2011/2012, chapter 0, pages 129-139 Czech National Bank, Research Department.
    14. Gabrielle Demange, 2012. "Contagion in financial networks: a threat index," PSE Working Papers halshs-00662513, HAL.
    15. Sergio R. S. Souza & Benjamin M. Tabak & Solange M. Guerra, 2013. "Insolvency and Contagion in the Brazilian Interbank Market," Working Papers Series 320, Central Bank of Brazil, Research Department.
    16. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.

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