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Only Paul Could Go To Changchun

Balance-sheet Diversification in General Equilibrium: Identification and Network Effects

8/26/2017

 
Here.

The paper uses disaggregated data on asset holdings and liabilities to estimate a general equilibrium model where each institution determines the diversification and size of the asset and liability sides of its balance-sheet. The model endogenously generates two types of financial networks: (i) a network of institutions when two institutions share common asset or liability holdings or when an institution holds an asset that is the liability of another. In both cases demand/supply decisions by one institution affect the value of other institutions' holdings/ liabilities, (ii) a network of financial instruments implied by the distribution of assets and liabilities within and across institutions. A change in the price of one asset induces change in demand/supply for all other assets, thus generating price comovement. The general equilibrium analysis predicts the propagation of real, financial and regulatory shocks as well as the change in the network caused by the shock.

From:

Jonas Heipertz
Paris School of Economics 

Amine Ouazad
HEC Montreal

Romain Rancière
University of Southern California 

Natacha Valla
European Investment Bank

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