Credit risk in general equilibrium |
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Authors: | Jürgen Eichberger Klaus Rheinberger Martin Summer |
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Institution: | 1. University of Heidelberg, Heidelberg, Germany 2. University of Applied Sciences Vorarlberg, Dornbirn, Austria 3. Oesterreichische Nationalbank, Vienna, Austria
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Abstract: | This paper contributes to the literature on default in general equilibrium. Borrowing and lending takes place via a clearing house (bank) that monitors agents and enforces contracts. Our model develops a concept of bankruptcy equilibrium that is a direct generalization of the standard general equilibrium model with financial markets. Borrowers may default in equilibrium and returns on loans are determined endogenously. Restricted to a special form of mean variance preferences, we derive a version of the capital asset pricing model with bankruptcy. In this case, we can characterize equilibrium prices and allocations and discuss implications for credit risk modeling. |
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