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Equilibrium Asset Pricing with Systemic Risk

  • Jean-Pierre Zigrand

    ()

  • Jon Danielsson

    ()

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.Journal of Economics Literature classification numbers: G12, G18, G20, D50.Keywords: systemic risk, value-at-risk, risk sensitive regulation, general equilibrium

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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp561.

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Date of creation: May 2006
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Handle: RePEc:fmg:fmgdps:dp561
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