Work

Asymmetric Price Movements and Borrowing Constraints: A Rational Expectations Equilibrium Model of Crises, Contagion, and Confusion

Year: 2005

Type: article

Abstract: ABSTRACT This study proposes a rational expectations equilibrium model of crises and contagion in an economy with information asymmetry and borrowing constraints. Consistent with empirical observations, the model finds: (1) Crises can be caused by small shocks to fundamentals; (2) market return distributions are asymmetric; and (3) correlations among asset returns tend to increase during crashes. The model also predicts: (1) Crises and contagion are likely to occur after small shocks in the intermediate price region; (2) the skewness of asset price distributions increases with information asymmetry and borrowing constraints; and (3) crises can spread through investor borrowing constraints.

Source: The Journal of Finance

DOI: 10.1111/j.1540-6261.2005.00733.x

Author: KATHY YUAN

Institutions: University of Utah, University of Michigan, University of Chicago, Arizona State University, Massachusetts Institute of Technology

Language: English

Topic: Economic theories and models

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2081884641

FWCI: 33.54

Cites: 46

Cited by: 370

Related to: 10