Booms,Busts, and Common Risk Exposures |
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| Authors: | ALEXANDR KOPYTOV |
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| Affiliation: | 1. Alexandr Kopytov is at the University of Rochester. I would like to thank Philip Bond (Editor), an anonymous associate editor, and two anonymous referees for many great comments that substantially improved the paper. I am deeply indebted to my advisors Itay Goldstein, Joao Gomes, Richard Kihlstrom, and Nikolai Roussanov. I thank my conference discussants, Enghin Atalay, Ana Babus, Celso Brunetti, Andres Donangelo, Frederic Malherbe, John Nash, and Stathis Tompaidis, for constructive comments and feedback. I also thank Andy Abel;2. Markus Brunnermeier;3. Anna Cororaton;4. Winston Dou;5. Itamar Drechsler;6. Deeksha Gupta;7. Urban Jermann;8. Mete Kilic;9. Tim Landvoigt;10. Jianan Liu;11. Tong Liu;12. Sebastien Plante;13. Tom Sargent;14. Robert Stambaugh;15. Mathieu Taschereau-Dumouchel;16. Chaojun Wang;17. Haotian Xiang;18. Amir Yaron;19. as well as seminar participants at UT Austin, Princeton, UNC, Duke, LBS, Maryland, HKU, HKUST, CUHK, FIRS, WFA, SED, Madison Junior Finance Conference, FRB Conference on the Interconnectedness of Financial Systems, FDIC/JFSR Annual Bank Research Conference, OFR/Cleveland Fed Financial Stability Conference, Cavalcade Asia-Pacific, Bank of Italy, and Bocconi University Conference on Financial Stability and Regulation for insightful comments. I am grateful to Frederik Eidam and Sascha Steffen for sharing their data on syndicated loans, and to Thomas Eisenbach for sharing the data on the Aggregate Vulnerability index. I acknowledge financial support from the Rodney L. White Center for Financial Research. Earlier versions of the paper circulated under the title “Financial networks over the business cycle.” I have read The Journal of Finance disclosure policy and I have nothing to disclose. |
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| Abstract: | I present a dynamic general equilibrium model in which commonality in bank assets endogenously changes over the business cycle and shapes systemic risk. To reduce individual risks, banks diversify, increasing portfolio overlap and hence the similarity of their exposures to fundamental shocks. Systemic financial crises burst at the end of credit booms when productive investment opportunities are exhausted, banks' diversification incentives are strong, and their portfolios are highly correlated. A calibrated model is able to match key moments related to frequency, severity, and the economy's behavior around systemic crises. |
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