Equilibrium asset pricing with systemic risk

Jon Danielsson and Jean-Pierre Zigrand

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: Systemic risk; Value-at-risk; Risk sensitive regulation; General equilibrium (search for similar items in EconPapers)
JEL-codes: D50 G12 G18 G20 (search for similar items in EconPapers)
Date: 2008-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Published in Economic Theory, May, 2008, 35(2), pp. 293-319. ISSN: 0938-2259

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http://eprints.lse.ac.uk/24823/ Open access version. (application/pdf)

Related works:
Journal Article: Equilibrium asset pricing with systemic risk (2008)
Working Paper: Equilibrium asset pricing with systemic risk (2006)
Working Paper: Equilibrium Asset Pricing with Systemic Risk (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24823

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