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Relative Risk Aversion And The Transmission Of Financial Crises

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  • 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.

Suggested Citation

  • Melisso Boschi & Aditya Goenka, 2007. "Relative Risk Aversion And The Transmission Of Financial Crises," CAMA Working Papers 2007-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2007-28
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    3. 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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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • 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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