Skip to main content
Article thumbnail
Location of Repository

Equilibrium asset pricing with systemic risk

By Jon Danielsson and Jean-Pierre Zigrand

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

Topics: HB Economic Theory
Publisher: Financial Markets Group, London School of Economics and Political Science
Year: 2006
OAI identifier: oai:eprints.lse.ac.uk:24515
Provided by: LSE Research Online

Suggested articles


To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.