Equilibrium Asset Pricing with Systemic Risk

Jean-Pierre Zigrand () and Jon Danielsson

FMG Discussion Papers from Financial Markets Group

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.Journal of Economics Literature classification numbers: G12, G18, G20, D50.Keywords: systemic risk, value-at-risk, risk sensitive regulation, general equilibrium

Date: 2006-05
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-fmk
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Related works:
Journal Article: Equilibrium asset pricing with systemic risk (2008)
Working Paper: Equilibrium asset pricing with systemic risk (2008)
Working Paper: Equilibrium asset pricing with systemic risk (2006)
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