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Balance sheet capacity and endogenous risk

Danielsson, Jon and Song Shin, Hyun and Zigrand, Jean-Pierre (2011) Balance sheet capacity and endogenous risk. FMG discussion paper series, 665. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Identification Number: 665

Abstract

Banks operating under Value-at-Risk constraints give rise to a welldefined aggregate balance sheet capacity for the banking sector as a whole that depends on total bank capital. Equilibrium risk and market risk premiums can be solved in closed form as functions of aggregate bank capital. We explore the empirical properties of the model in light of recent experience in the financial crisis and highlight the importance of balance sheet capacity as the driver of the financial cycle and market risk premiums.

Item Type: Monograph (Discussion Paper)
Official URL: http://www2.lse.ac.uk/fmg/home.aspx
Additional Information: © 2011 Financial Markets Group, London School of Economics and Political Science
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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
Date Deposited: 16 Apr 2012 15:40
Last Modified: 07 Aug 2013 11:07
URI: http://eprints.lse.ac.uk/id/eprint/43141

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