Price Contagion through Balance Sheet Linkages

Agostino Capponi and Martin Larsson

The Review of Asset Pricing Studies, 2015, vol. 5, issue 2, 227-253

Abstract: We study price linkages between assets held by financial institutions that maintain fixed capital structures over time. Firms in the banking sector manage their leverage ratios to conform to prespecified levels. Our analysis suggests that regulatory policies aimed at stabilizing the system by imposing capital constraints on banks may have unintended consequences: banks’ deleveraging activities may amplify asset return shocks and lead to large fluctuations in realized returns. The same mechanism can cause spillover effects, where assets held by leverage targeting banks can experience hikes or drops caused by shocks to otherwise unrelated assets held by the same banks.

JEL-codes: G10 G12 G21 G38 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:rasset:v:5:y:2015:i:2:p:227-253.

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