Equilibrium asset pricing with systemic risk

Danielsson, Jon ORCID: 0009-0006-9844-7960 and Zigrand, Jean-Pierre ORCID: 0000-0002-7784-4231 (2008) Equilibrium asset pricing with systemic risk. Economic Theory, 35 (2). pp. 293-319. ISSN 0938-2259

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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:	Article
Official URL:	http://www.springer.com/economics/economic+theory/...
Additional Information:	© Springer-Verlag 2007
Divisions:	Finance Financial Markets Group
Subjects:	H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D50 - General G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
Date Deposited:	12 Aug 2009 09:41
Last Modified:	01 Oct 2024 03:34
URI:	http://eprints.lse.ac.uk/id/eprint/24823

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