Balance sheet capacity and endogenous risk

Jon Danielsson, Hyun Song Shin and Jean-Pierre Zigrand

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

Abstract: Banks operating under Value-at-Risk constraints give rise to a welldefined aggregate balance sheet capacity for the banking sector as a whole that depends on total bank capital. Equilibrium risk and market risk premiums can be solved in closed form as functions of aggregate bank capital. We explore the empirical properties of the model in light of recent experience in the financial crisis and highlight the importance of balance sheet capacity as the driver of the financial cycle and market risk premiums.

Keywords: banking crisis; financial intermediation; value-at-risk (search for similar items in EconPapers)
JEL-codes: G1 G21 G32 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2011-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (50)

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http://eprints.lse.ac.uk/43141/ Open access version. (application/pdf)

Related works:
Working Paper: Balance Sheet Capacity and Endogenous Risk (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:43141

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