This paper explains why banks derive a benefit from being highly interconnected. We show that when banks are protected by government guarantees they can significantly increase their expected returns by channeling funds ...

It is a major challenge for asset pricing models to generate a high equity premium and a low risk-free rate while imposing realistic consumption dynamics. To address this issue, our paper proposes a novel pricing channel: ...

We develop a network model whose links are governed by banks' optmizing decisions and by an endogenous tâtonnement market adjustment. Banks in our model can default and engage in re-sales: risk is transmitted through direct ...

In this paper, we develop a state-dependent sensitivity value-at-risk (SDSVaR) approach that enables us to quantify the direction, size, and duration of risk spillovers among financial institutions as a function of the ...

This paper compares two classes of models that allow for additional channels of correlation between asset returns: regime switching models with jumps and models with contagious jumps. Both classes of models involve a hidden ...

We propose a novel approach on how to estimate systemic risk and identify its key determinants. For US financial companies with publicly traded equity options, we extract option-implied value-at-risks and measure the ...

The analyses of intersectoral linkages of Leontief (1941) and Hirschman (1958) provide a natural way to study the transmission of risk among interconnected banks and to measure their systemic importance. In this paper we ...

We analyze the equilibrium in a two-tree (sector) economy with two regimes. The output of each tree is driven by a jump-diffusion process, and a downward jump in one sector of the economy can (but need not) trigger a shift ...

We introduce a new measure of systemic risk, the change in the conditional joint probability of default, which assesses the effects of the interdependence in the financial system on the general default risk of sovereign ...

We employ a unique identification strategy linking survey data on household consumption expenditure to bank-level data to estimate the effects of bank financial distress on consumer credit and consumption expenditures. We ...