Market Discipline and Systemic Risk

Morrison, Alan and Walther, Ansgar Market Discipline and Systemic Risk. Management Science. (Accepted)

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Abstract

We analyze a general equilibrium model in which financial institutions generate endogenous systemic risk. Banks optimally select correlated investments and thereby expose themselves to re-sale risk so as to sharpen their incentives. Systemic risk is therefore a natural consequence of banks' fundamental role as delegated monitors. Our model sheds light on recent and historical trends in measured systemic risk. Technological innovations and government-directed lending can cause surges in systemic risk. Strict capital requirements and well-designed government asset purchase programs can combat systemic risk.

Item Type: Article
Keywords: systemic risk, market discipline, return correlation, macro-prudential regulation, finance
Subject(s): Finance
Date Deposited: 12 Nov 2018 10:21
Last Modified: 12 Nov 2018 10:21
Funders: n/a
URI: http://eureka.sbs.ox.ac.uk/id/eprint/7040

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