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Endogenous and systemic risk

Danielsson, Jon, Song Shin, Hyun and Zigrand, Jean-Pierre (2012) Endogenous and systemic risk. NBER chapters, 12054. National Bureau of Economic Research, Massachusetts, USA.

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Abstract

The risks impacting financial markets are attributable (at least in part) to the actions of market participants. In turn, market partic- ipants’ actions depend on perceived risk. In equilibrium, risk is the fixed point of the mapping from perceived risk to actual risk. When market players believe trouble is ahead, they take actions that bring about realized volatility. This is “endogenous risk.” A model of en- dogenous risk enables the study of the propagation of financial booms and distress. Among other things, we can make precise the notion that market participants appear to become “more risk–averse” in re- sponse to deteriorating market outcomes. For economists, preferences and beliefs would normally be considered independent of one another. We discuss modeling of endogenous risk and some of its distinctive features, both theoretical and empirical.

Item Type: Monograph (Working Paper)
Official URL: http://www.nber.org/
Additional Information: © 2012 The Authors
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Journal of Economic Literature Classification System: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Sets: Departments > Finance
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 12054
Date Deposited: 16 Apr 2012 15:28
URL: http://eprints.lse.ac.uk/43139/

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