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Financial Fragility, Liquidity, and Asset Prices
Open accessAbstract
We define a financial system to be fragile if small shocks have disproportionately large effects. In a model of financial intermediation, we show that small shocks to the demand for liquidity cause either high asset-price volatility or bank defaults or both. Furthermore, as the liquidity shocks become vanishingly small, the asset-price volatility is bounded away from zero. In the limit economy, with no shocks, there are many equilibria. However, if banks face idiosyncratic liquidity shocks, then the only equilibria that are robust to the introduction of small aggregate risk involve stochastic consumption as well as volatile asset, prices.
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Citations
Cited by
Market Liquidity and Funding Liquidity
Brunnermeier, M. K., & Pedersen, L. H. (2009) · Review of Financial Studies · doi:10.1093/rfs/hhn098 · Cited by 4,835
Competition and Financial Stability
Allen, F., & Gale, D. (2004) · Journal of Money, Credit, and Banking · doi:10.1353/mcb.2004.0038 · Cited by 1,137
Self-citationAmihud, Y., Mendelson, H., & Pedersen, L. H. (2005) · Foundations and Trends® in Finance · doi:10.1561/0500000003 · Cited by 820
Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis
Hellwig, M. F. (2009) · De Economist · doi:10.1007/s10645-009-9110-0 · Cited by 389
Financial System: Shock Absorber or Amplifier?
Allen, F., & Carletti, E. (2008) · SSRN Electronic Journal · doi:10.2139/ssrn.1165642 · Cited by 23
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Metadata
- Authors
- Allen, F., & Gale, D.
- Venue
- Journal of the European Economic Association
- Publisher
- Oxford University Press (OUP)
- Published
- 2004-12-01
- Volume
- 2
- Issue
- 6
- Pages
- 1015-1048
- ISSN
- 1542-4766 (ISSN-L)
- 1542-4774
- OpenAlex
- W3123596003
- Cited by
- 348
- References
- 0
- FWCI
- 25.29
- Type
- journal article
- Language
- en
- Open access
- green
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