Equilibrium asset pricing with systemic risk

Danielsson, Jon and Zigrand, Jean-Pierre ORCID: 0000-0002-7784-4231 (2006) Equilibrium asset pricing with systemic risk. Financial Markets Group Discussion Papers (561). Financial Markets Group, The London School of Economics and Political Science, London, 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.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2006 The Authors
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D50 - General G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
Date Deposited:	16 Jul 2009 14:34
Last Modified:	03 Feb 2023 14:54
URI:	http://eprints.lse.ac.uk/id/eprint/24515

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