We address the paradox that financial innovations aimed at risk-sharing appear to have made the world riskier … liquid assets. When risk-sharing is primitive, agents selfhedge and hold more liquid assets; this buffers aggregate risks …, resulting in few correlated failures compared to when there is greater risk sharing. We apply this insight to build a model of a …

well-functioning marketplace will also exist in the future. Market liquidity risk is the risk that the market will function … effects of market liquidity risk on asset pricing, investment management, corporate finance, banking, financial crises …

risk in which all banks choose inefficiently high leverage to fund correlated assets and market discipline is compromised … ; systemic risk ; bailout ; forbearance ; moral hazard ; capital requirements …

We develop a theory of optimal bank leverage in which the benefit of debt in inducing loan monitoring is balanced … against the benefit of equity in attenuating risk-shifting. However, faced with socially-costly correlated bank failures …, regulators bail out creditors. Anticipation of this generates multiple equilibria, including one with systemic risk in which …

We develop a theory of optimal bank leverage in which the benefit of debt in inducing loan monitoring is balanced … against the benefit of equity in attenuating risk-shifting. However, faced with socially-costly correlated bank failures …, regulators bail out creditors. Anticipation of this generates multiple equilibria, including one with systemic risk in which …

contingent liquidity risk from the provision of credit lines to NBFIs; and (iii) Empirical work confirms bank-NBFI linkages … through the correlation of their abnormal equity returns and market-based measures of systemic risk. We discuss some potential … regulatory responses, including treating the two sectors holistically; recognizing the implications for risk propagation and …