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Relative Risk Aversion And The Transmission Of Financial Crises

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Listed author(s):
  • Melisso Boschi
  • Aditya Goenka

Abstract

We study how investor behaviour affects the transmission of financial crises. If investors exhibit decreasing relative risk aversion, then negative wealth shocks increase the risk premium required to hold risky assets. We integrate this into a second generation model of currency crises which allows for a competitiveness effect and for contagion through changes in fundamentals. The investor behaviour can lead to the transmission of financial crises even in the absence of the competitiveness effect, and makes multiple equilibria more likely. The possible stabilization effects of capital controls and a Tobin tax on the international transmission of financial crises are also studied.

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File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2017-02/28_boschi_goenka_2007.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2007-28.

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Length: 28 pages
Date of creation: Oct 2007
Handle: RePEc:een:camaaa:2007-28
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Find related papers by JEL classification:
  • D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
  • F31 - International Economics - - International Finance - - - Foreign Exchange
  • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
  • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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Cited by:

  1. M Boschi & S d'Addona & A Goenka, 2012. "Testing external habits in an asset pricing model," CAMA Working Papers 2012-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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