Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144448
Authors: 
Brunnermeier, Markus K.
Sannikov, Yuliy
Year of Publication: 
2012
Series/Report no.: 
Working Paper Research 236
Abstract: 
This paper studies the full equilibrium dynamics of an economy with financial frictions. Due to highly non-linear amplification effects, the economy is prone to instability and occasionally enters volatile episodes. Risk is endogenous and asset price correlations are high in down turns. In an environment of low exogenous risk experts assume higher leverage making the system more prone to systemic volatility spikes - a volatility paradox. Securitization and derivatives contracts leads to better sharing of exogenous risk but to higher endogenous systemic risk. Financial experts may impose a negative externality on each other and the economy by not maintaining adequate capital cushion.
Document Type: 
Working Paper

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