Banks operating under Value-at-Risk constraints give rise to a well-defined aggregate balance sheet capacity for the banking sector as a whole that depends on total bank capital. Equilibrium risk and market risk premiums can be solved in closed form as functions of aggregate bank capital. We...

In this paper we compare overall as well as downside risk measures with respect to the criteria of first and second order stochastic dominance. While the downside risk measures, with the exception of tail conditional expectation, are consistent with first order stochastic dominance, overall risk...

We study an equilibrium model with restricted investor participation in which strategic arbitrageurs reap profits by exploiting mispricings across different trading locations.  We edogonize the asset structure as the outcome of the security design game played by the arbitrageurs.  The...

Risk is endogenous. Equilibrium risk is the fixed point of the mapping that takes perceived risk to actual risk. When risk-neutral traders operate under Value-at-Risk constraints, market conditions exhibit signs of fluctuating risk appetite and amplification of shocks through feedback effects....

Market liquidity is typically characterized by a number of ad hoc metrics, such as depth, volume, bid-ask spreads etc. No general coherent definition seems to exist, and few attempts have been made to justify the existing metrics on welfare grounds. In this paper we propose a welfare-based...

Many financial applications, such as risk analysis and derivatives pricing, depend on time scaling of risk.  A common method for this purpose, though only correct when returns are iid normal, is the square root of time rule where an estimated quantile of a return distribution is scaled to a...

The implications of Value-at-Risk regulations are analyzed in a CARA-normal general equilibrium model. Financial institutions are heterogeneous in risk preferences, wealth and the degree of supervision. Regulatory risk constraints lower the probability of one form of a systemic crisis, at the...

We analyse a general equilibrium model of strategic arbitraging and intermediation. Arbitrageurs take advantage of mispricings, market frictions and manipulation opportunities in order to maximise profits. We analyse the effects of increased competition among arbitrageurs due to lower entry...

Risk management systems in current use treat the statistical relations governing asset returns as being exogenous, and attempt to estimate risk only by reference to historical data. These systems fail to take into account the feedback effect in which trading decisions impinge on prices. We...

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...