Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
960687 | Journal of Financial Intermediation | 2013 | 29 Pages |
Abstract
In our model, financial firms’ leverage choices and asset sales impose negative externalities on other financial firms. This means that individual firms cannot determine their optimal capitalizations in isolation, but have to take the aggregate financial sector characteristics into account. In particular, they become more aggressive when their peers are more conservative. Furthermore, financial firms over-consume liquidity in equilibrium. For some parameter regions, small parameter changes can induce large differences in the equilibrium allocation of risk. Historical experience is not necessarily a good guide as to whether the prevailing equilibrium is fragile or not.
Related Topics
Social Sciences and Humanities
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Strategy and Management
Authors
Antonio E. Bernardo, Ivo Welch,