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Risk Aversion, Uninsurable Idiosyncratic Risk, and the Financial Accelerator

Author

Listed:
  • Giacomo Candian

    (HEC Montreal)

  • Mikhail Dmitriev

    (Florida State University)

Abstract

We develop a tractable model to study jointly the role of non-diversifiable risk and financial frictions for business cycles. Non-diversifiable risk induces strong precautionary motives, which reduce the exposure of entrepreneurs to aggregate disturbances ex-ante, and make it easier to increase leverage ex-post. In general equilibrium, these precautionary motives dampen fluctuations in asset prices and risk premia, thus making the economy more resilient to financial shocks. We provide microeconomic evidence consistent with the model's predictions about firm behavior. (Copyright: Elsevier)

Suggested Citation

  • Giacomo Candian & Mikhail Dmitriev, 2020. "Risk Aversion, Uninsurable Idiosyncratic Risk, and the Financial Accelerator," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 299-322, July.
    • Handle: RePEc:red:issued:18-70
    DOI: 10.1016/j.red.2020.03.003
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    Cited by:

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    3. Zhou, Jing, 2022. "Collateral quality and house prices," Journal of Economic Dynamics and Control, Elsevier, vol. 145(C).
    4. Dindo, Pietro & Modena, Andrea & Pelizzon, Loriana, 2022. "Risk pooling, intermediation efficiency, and the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    5. Higgins, C. Richard, 2023. "Risk and Uncertainty: The Role of Financial Frictions," Economic Modelling, Elsevier, vol. 119(C).

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    More about this item

    Keywords

    Risk aversion; Uninsurable idiosyncratic risk; Financial accelerator; Incomplete markets;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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