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Title: Relative risk aversion and the transmission of financial crises
Authors: Boschi, M.
Goenka, A. 
Keywords: Capital controls
Financial crises
International asset pricing
Relative risk aversion
Tobin tax
Wealth effects
Issue Date: Jan-2012
Citation: Boschi, M., Goenka, A. (2012-01). Relative risk aversion and the transmission of financial crises. Journal of Economic Dynamics and Control 36 (1) : 85-99. ScholarBank@NUS Repository.
Abstract: We study how investor behavior affects the transmission of financial crises. If investors exhibit decreasing relative risk aversion, then negative wealth shocks increase the risk premium required to hold risky assets. We integrate this into a second generation model of currency crises which allows for contagion through changes in fundamentals. Investor behavior can be a transmission channel of financial crises, as changes in risk premia increase the coverage ratio and makes the defense of a peg less attractive for the policy maker. The feedback effect of the risk premia on the probability of devaluation also makes multiple equilibria more likely. The possible stabilization effects of capital controls and a Tobin tax on the international transmission of financial crises are also studied. © 2011 Elsevier B.V.
Source Title: Journal of Economic Dynamics and Control
ISSN: 01651889
DOI: 10.1016/j.jedc.2011.07.005
Appears in Collections:Staff Publications

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