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Equilibrium Asset Pricing with Systemic Risk

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  • Jean-Pierre Zigrand

    ()

  • Jon Danielsson

    ()

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.Journal of Economics Literature classification numbers: G12, G18, G20, D50.Keywords: systemic risk, value-at-risk, risk sensitive regulation, general equilibrium

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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp561.

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Date of creation: May 2006
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Handle: RePEc:fmg:fmgdps:dp561

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Citations

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Cited by:
  1. Schaeck, K. & Silva Buston, C.F. & Wagner, W.B., 2013. "The Two Faces of Interbank Correlation," Discussion Paper 2013-077, Tilburg University, Center for Economic Research.
  2. Bruce Mizrach, 2012. "Comment on "Endogenous and Systemic Risk"," NBER Chapters, in: Quantifying Systemic Risk, pages 94-105 National Bureau of Economic Research, Inc.
  3. 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.
  4. Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2010. "Econometric Measures of Systemic Risk in the Finance and Insurance Sectors," NBER Working Papers 16223, National Bureau of Economic Research, Inc.
  5. Jean-Pierre Zigrand & Hyun Song Shin & Jon Danielsson, 2010. "Risk Appetite and Endogenous Risk," FMG Discussion Papers dp647, Financial Markets Group.
  6. Alexander, Gordon J. & Baptista, Alexandre M., 2009. "Stress testing by financial intermediaries: Implications for portfolio selection and asset pricing," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 65-92, January.
  7. Frank Milne, 2008. "Credit Crises, Risk Management Systems and Liquidity Modelling," Working Papers 1, John Deutsch Institute for the Study of Economic Policy.
  8. Chollete, Loran, 2011. "A Model of Endogenous Extreme Events," UiS Working Papers in Economics and Finance 2012/2, University of Stavanger.
  9. Jose Fique & Frank Page, 2013. "Rollover risk and endogenous network dynamics," Computational Management Science, Springer, vol. 10(2), pages 213-230, June.

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