Danielsson, Jon and Zigrand, Jean-Pierre (2006) Equilibrium asset pricing with systemic risk. Discussion paper, 561. Financial Markets Group, 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) |
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| Official URL: | http://fmg.lse.ac.uk |
| Additional Information: | © 2006 The Authors |
| Uncontrolled Keywords: | Systemic risk, Value-at-risk, Risk sensitive regulation, General equilibrium |
| Library of Congress subject classification: | H Social Sciences > HB Economic Theory |
| Journal of Economic Literature Classification System: | 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 |
| Sets: | Research centres and groups > Financial Markets Group (FMG) Collections > Economists Online |
| Rights: | http://www.lse.ac.uk/library/rights/LSERO.htm |
| Identification Number: | 561 |
| URL: | http://eprints.lse.ac.uk/24515/ |
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