Balance-Sheet Diversification in General Equilibrium: Identification and Network Effects

Rancière, Romain, Jonas Heipertz, Amine Ouazad () and Natacha Valla
Authors registered in the RePEc Author Service: Romain Rancière

No 12134, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper uses disaggregated data on asset holdings and liabilities to estimate a general equilibrium model where each institution determines the diversification and size of the asset and liability sides of its balance-sheet. The model endogenously generates two types of financial networks: (i) a network of institutions when two institutions share common asset or liability holdings or when an institution holds an asset that is the liability of another. In both cases demand/supply decisions by one institution affect the value of other institutions' holdings/liabilities, (ii) a network of financial instruments implied by the distribution of assets and liabilities within and across institutions. A change in the price of one asset induces change in demand/supply for all other assets, thus generating price comovement. The general equilibrium analysis predicts the propagation of real, financial and regulatory shocks as well as the change in the network caused by the shock.

Keywords: Financial networks; Asset pricing; General equilibrium model of asset trade; Heterogenous beliefs; Dynamic factors (search for similar items in EconPapers)
JEL-codes: G01 G11 G12 G15 L14 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Balance-Sheet Diversification in General Equilibrium: Identification and Network Effects (2017)
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