A Model of Capital and Crises

Zhiguo He () and Arvind Krishnamurthy

No 14366, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a model in which the capital of the intermediary sector plays a critical role in determining asset prices. The model is cast within a dynamic general equilibrium economy, and the role for intermediation is derived endogenously based on optimal contracting considerations. Low intermediary capital reduces the risk-bearing capacity of the marginal investor. We show how this force helps to explain patterns during financial crises. The model replicates the observed rise during crises in Sharpe ratios, conditional volatility, correlation in price movements of assets held by the intermediary sector, and fall in riskless interest rates.

JEL-codes: E44 G12 G18 G2 (search for similar items in EconPapers)
Date: 2008-09
New Economics Papers: this item is included in nep-dge and nep-mac
Note: AP CF
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Citations: View citations in EconPapers (35)

Published as A Model of Capital and Crises, 2012, with Arvind Krishnamurthy, Review of Economic Studies 79(2): pp. 735-777. Presentation Slides.

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Related works:
Journal Article: A Model of Capital and Crises (2012)
Working Paper: A Model of Capital and Crises (2009)
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