Asymmetric price movements and borrowing constraints: a rational expectations equilibrium model of crises, contagion, and confusion

Yuan, Kathy ORCID: 0000-0001-9895-7545 (2005) Asymmetric price movements and borrowing constraints: a rational expectations equilibrium model of crises, contagion, and confusion. Journal of Finance, 60 (1). pp. 379-411. ISSN 0022-1082

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Abstract

This study proposes a rational expectations equilibrium model of crises and contagion in an economy with information asymmetry and borrowing constraints. Consistent with empirical observations, the model finds: (1) Crises can be caused by small shocks to fundamentals; (2) market return distributions are asymmetric; and (3) correlations among asset returns tend to increase during crashes. The model also predicts: (1) Crises and contagion are likely to occur after small shocks in the intermediate price region; (2) the skewness of asset price distributions increases with information asymmetry and borrowing constraints; and (3) crises can spread through investor borrowing constraints.

Item Type:	Article
Official URL:	http://www.afajof.org/
Additional Information:	© 2005 The American Finance Association
Divisions:	Finance
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
JEL classification:	C - Mathematical and Quantitative Methods > C5 - Econometric Modeling D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited:	10 Nov 2011 11:31
Last Modified:	11 Dec 2024 22:56
URI:	http://eprints.lse.ac.uk/id/eprint/39405

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