Equilibrium Asset Pricing with Systemic Risk
AbstractWe 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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Date of creation: May 2006
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- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- K20 - Law and Economics - - Regulation and Business Law - - - General
- M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
- M40 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-27 (All new papers)
- NEP-CFN-2006-05-27 (Corporate Finance)
- NEP-FIN-2006-05-27 (Finance)
- NEP-FMK-2006-05-27 (Financial Markets)
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