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Balance sheet capacity and endogenous risk

  • Jon Danielsson
  • Hyun Song Shin
  • Jean-Pierre Zigrand

Banks operating under Value-at-Risk constraints give rise to a welldefined aggregate balance sheet capacity for the banking sector as a whole that depends on total bank capital. Equilibrium risk and market risk premiums can be solved in closed form as functions of aggregate bank capital. We explore the empirical properties of the model in light of recent experience in the financial crisis and highlight the importance of balance sheet capacity as the driver of the financial cycle and market risk premiums.

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File URL: http://eprints.lse.ac.uk/43141/
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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 43141.

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Length: 36 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:ehl:lserod:43141
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  8. Tobias Adrian & Emanuel Moench & Hyun Song Shin, 2010. "Financial intermediation, asset prices, and macroeconomic dynamics," Staff Reports 422, Federal Reserve Bank of New York.
  9. Basak, Suleyman & Croitoru, Benjamin, 2000. "Equilibrium Mispricing in a Capital Market with Portfolio Constraints," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 715-48.
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  14. Gai, Prasanna & Vause, Nicholas, 2005. "Measuring Investors' Risk Appetite," MPRA Paper 818, University Library of Munich, Germany.
  15. repec:fth:starer:9825 is not listed on IDEAS
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