Default and Systemic Risk in Equilibrium

Economy – Quantitative Finance – Pricing of Securities

Scientific paper

Rate now

  [ 0.00 ] – not rated yet Voters 0   Comments 0

Details

Scientific paper

We develop a finite horizon continuous time market model, where risk averse investors maximize utility from terminal wealth by dynamically investing in a risk-free money market account, a stock written on a default-free dividend process, and a defaultable bond, whose prices are determined via equilibrium. We analyze financial contagion arising endogenously between the stock and the defaultable bond via the interplay between equilibrium behavior of investors, risk preferences and cyclicality properties of the default intensity. We find that the equilibrium price of the stock experiences a jump at default, despite that the default event has no causal impact on the dividend process. We characterize the direction of the jump in terms of a relation between investor preferences and the cyclicality properties of the default intensity. We conduct similar analysis for the market price of risk and for the investor wealth process, and determine how heterogeneity of preferences affects the exposure to default carried by different investors.

No associations

LandOfFree

Say what you really think

Search LandOfFree.com for scientists and scientific papers. Rate them and share your experience with other people.

Rating

Default and Systemic Risk in Equilibrium does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with Default and Systemic Risk in Equilibrium, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Default and Systemic Risk in Equilibrium will most certainly appreciate the feedback.

Rate now

     

Profile ID: LFWR-SCP-O-14890

All data on this website is collected from public sources. Our data reflects the most accurate information available at the time of publication.