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Equilibrium asset pricing with systemic risk

  • Jon Danielsson
  • Jean-Pierre Zigrand

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.

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File URL: http://eprints.lse.ac.uk/24515/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24515.

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Length: 32 pages
Date of creation: 11 May 2006
Date of revision:
Handle: RePEc:ehl:lserod:24515
Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
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Web page: http://www.lse.ac.uk/

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