Risk and Liquidity in a System Context
This paper explores the pricing of debt in a financial system where the assets that borrowers hold to meet their obligations include claims against other borrowers. Assessing financial claims in a system context captures features that are missing in a partial equilibrium setting. It is possible for spreads to fall as debts rise, as debt-fuelled increases in asset prices and stronger balance sheets reinforce each other. Conversely, it is possible that de-leveraging leads to increases in spreads, as is often observed during crises.
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Risk and liquidity in a system context
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accounting numbers accounting standards adjustment Anne Beatty asset prices asset values bank equity borrowers CDOs claims and obligations collateralized debt obligations comparative statics result complete lattice credit default swap curve debt prices deﬁned Denote endowments equity value European Central Bank face value feedback FFVA Figure ﬁnance Financial ﬁnancial distress ﬁnancial instability ﬁnancial institutions ﬁnancial intermediaries ﬁnancial markets ﬁnancial stability ﬁnancial system ﬁxed point theorem framework fundamental asset hedge funds housing stock i’s assets implies lemma lending boom liquidity drains loans Management and Prudential mapping F marked-to-market value market value marking to market minimum leverage old households overall parameters payoff pricing of debt Prof Shin prudential regulation realized value risk management risk proﬁle satisﬁed shift solvency constraint solvency region spillover effects stochastic dominance stronger balance sheets system context systemic risk Tarski’s ﬁxed point trillion unleveraged investor value of debt value of equity value of i’s value of investor well-deﬁned young households