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Balance-Sheet Diversification in General Equilibrium: Identification and Network Effects

Author

Listed:
  • Jonas Heipertz
  • Amine Ouazad
  • Romain Rancière
  • Natacha Valla

Abstract

The paper uses disaggregated data on asset holdings and liabilities to estimate a general equilibrium model where each institution determines the diversification and size of the asset and liability sides of its balance-sheet. The model endogenously generates two types of financial networks: (i) a network of institutions when two institutions share common asset or liability holdings or when an institution holds an asset that is the liability of another. In both cases demand/supply decisions by one institution affect the value of other institutions' holdings/liabilities, (ii) a network of financial instruments implied by the distribution of assets and liabilities within and across institutions. A change in the price of one asset induces change in demand/supply for all other assets, thus generating price comovement. The general equilibrium analysis predicts the propagation of real, financial and regulatory shocks as well as the change in the network caused by the shock.

Suggested Citation

  • Jonas Heipertz & Amine Ouazad & Romain Rancière & Natacha Valla, 2017. "Balance-Sheet Diversification in General Equilibrium: Identification and Network Effects," NBER Working Papers 23572, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23572
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    References listed on IDEAS

    as
    1. Tony Berrada, 2006. "Incomplete Information, Heterogeneity, and Asset Pricing," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(1), pages 136-160.
    2. Silvia Miranda-Agrippino & Hélène Rey, 2015. "US Monetary Policy and the Global Financial Cycle," NBER Working Papers 21722, National Bureau of Economic Research, Inc.
    3. Ang, Andrew, 2014. "Asset Management: A Systematic Approach to Factor Investing," OUP Catalogue, Oxford University Press, number 9780199959327.
    4. Amit Gandhi & Ricardo Serrano-Padial, 2015. "Does Belief Heterogeneity Explain Asset Prices: The Case of the Longshot Bias," Review of Economic Studies, Oxford University Press, vol. 82(1), pages 156-186.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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