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Equilibrium asset pricing with systemic risk

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  • Jón Daníelsson
  • Jean-Pierre Zigrand

    ()

Abstract

We provide an equilibrium multi-asset pricing model with micro-founded systemic risk and heterogeneous investors. Systemic risk arises due to excessive leverage and risk taking induced by free-riding externalities. Global risk-sensitive 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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File URL: http://hdl.handle.net/10.1007/s00199-007-0238-3
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 35 (2008)
Issue (Month): 2 (May)
Pages: 293-319

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Handle: RePEc:spr:joecth:v:35:y:2008:i:2:p:293-319

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Related research

Keywords: Systemic risk; Value-at-risk; Risk sensitive regulation; General equilibrium; G12; G18; G20; D50;

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Citations

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Cited by:
  1. Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2010. "Econometric Measures of Systemic Risk in the Finance and Insurance Sectors," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
  2. Jose Fique & Frank Page, 2013. "Rollover risk and endogenous network dynamics," Computational Management Science, Springer, vol. 10(2), pages 213-230, June.
  3. Jean-Pierre Zigrand & Hyun Song Shin & Jon Danielsson, 2010. "Risk Appetite and Endogenous Risk," FMG Discussion Papers, Financial Markets Group dp647, Financial Markets Group.
  4. Chollete, Loran, 2011. "A Model of Endogenous Extreme Events," UiS Working Papers in Economics and Finance 2012/2, University of Stavanger.
  5. Alexander, Gordon J. & Baptista, Alexandre M., 2009. "Stress testing by financial intermediaries: Implications for portfolio selection and asset pricing," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 18(1), pages 65-92, January.
  6. Schaeck, K. & Silva Buston, C.F. & Wagner, W.B., 2013. "The Two Faces of Interbank Correlation," Discussion Paper, Tilburg University, Center for Economic Research 2013-077, Tilburg University, Center for Economic Research.
  7. Glenn Boyle & Richard Meade, 2008. "Intra-country regulation of share markets: does one size fit all?," European Journal of Law and Economics, Springer, vol. 25(2), pages 151-165, April.
  8. Bruce Mizrach, 2012. "Comment on "Endogenous and Systemic Risk"," NBER Chapters, in: Quantifying Systemic Risk, pages 94-105 National Bureau of Economic Research, Inc.
  9. Frank Milne, 2008. "Credit Crises, Risk Management Systems and Liquidity Modelling," Working Papers 1, John Deutsch Institute for the Study of Economic Policy.

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