Equilibrium asset pricing with systemic risk

   Daníelsson, J. and J.-P. Zigrand (2008). Equilibrium asset pricing with systemic risk. Economic Theory 35, 293–319. http://www.RiskResearch.org.

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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.

@ARTICLE{DanielssonZigrand2008,
 author =  {J{\'o}n Dan{\'\i}elsson and Jean--Pierre Zigrand},
 title =   {Equilibrium asset pricing with systemic risk},
 journal = "Economic Theory",
 volume =  {35},
 pages =   {293--319},
 year =    2008,
 note =    {\tt http://www.RiskResearch.org},
 url =     {RiskResearch.org},
}