Equilibrium asset pricing with systemic risk |
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Authors: | Jón Daníelsson Jean-Pierre Zigrand |
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Institution: | (1) London School of Economics and FMG, Houghton Street, London, WC2A 2AE, UK |
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Abstract: | 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.
We thank Michel Habib, José Scheinkman, Hyun Shin and two anonymous referees for their helpful comments. Jean-Pierre Zigrand
is a lecturer in Finance at the LSE, and is the corresponding author. The authors would like to acknowledge financial support
under the EPSRC Grant GR/S83975/01 at the Financial Markets Group, London School of Economics. |
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Keywords: | Systemic risk Value-at-risk Risk sensitive regulation General equilibrium |
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