This paper argues that market price sensitive capital regulation together with financial regulator’s bailout policy can induce banks to herd by investing in highly correlated asset ex ante, thus increase the likelihood of systemic risk ex post. The paper follows Acharya and Yorulmazer’s (2007) study of “Too Many to Fail” problem in a twobank model. They argue that in order to reduce the social ...

We introduce intermediation frictions into a Lucas (1978) asset pricing model in order to study the effects of low capital in the intermediary sector on asset prices. Our model shows that low intermediary capital can increase risk premia, Sharpe ratios, volatility and comovement among intermediated assets. Reductions in intermediary capital also lead to a flight-to-quality in which intermediari...

I present a model in which sellers can signal the quality of an asset both by retaining a fraction of the asset and by choosing the liquidity of the market in which they search for buyers. Although these signals may seem interchangeable, I present two settings which show they are not. In the first setting, sellers have private information regarding only asset quality, and I show that liquidity ...

We propose a noisy rational expectations equilibrium model of asset markets with rationally inattentive investors. incorporate any finite number assets arbitrary correlation. also do not restrict the signal form and show that investors optimally choose single signal, which is linear combination all risky assets. This generates comovement prices contagion shocks, even when payoffs are negatively...

This paper examines the role of money in understanding the behavior of asset prices and whether and how monetary policy should react to asset prices such as stock prices and equity premiums. To do so, I introduce money via the form of transaction cost into a production economy with limited stock market participation where agents with lower inter-temporal elasticity of substitution (IES), called...

We examine the effectiveness of asset markets when the final outcome upon which the asset payout is based maybe affected by the unobservable actions of the traders. Players participate in a minimum effort coordination game preceeded by an information market where the asset payoffs are determined by the observed minimum effort level in the subsequent game. We examine both the informativeness of ...