ASSET ALLOCATION AND ASSET PRICING IN THE FACE OF SYSTEMIC RISK: A LITERATURE OVERVIEW AND ASSESSMENT

This paper provides a detailed overview of the current research linking systemic risk, financial crises and contagion effects among assets on the one hand with asset allocation and asset pricing theory on the other hand. Based on the ample literature about definitions, measurement and properties of systemic risk, we derive some elementary ingredients for models of financial contagion and assess the current state of knowledge about asset allocation and asset pricing with explicit focus on systemic risk. The paper closes with a brief outlook on future research possibilities and some recommendations for the further development of capital market models incorporating financial contagion.