Modelling financial turmoil through endogenous risk

Endogenous risk

By incorporating endogenous risk into a standard asset-pricing model, this column shows how banks' capacity to bear risk seemingly evaporates in the face of market turmoil, pushing the financial system further into a tailspin. It suggests that risk-sensitive prudential regulation, in the spirit of Basel II, makes systemic financial crises sharper, larger, and more costly.


Models and risk | Financial Regulation, Systemic Risk, Stability and AI

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