Equilibrium Investment with Random and State-Dependent Risk Aversion

Description

Abstract: In this talk, I will introduce a simple interbank model with stochastic dynamics and multiple maturities, allowing us to study the systemic risk-aware term structure for interbank claims. To account for informational contagion, we consider a mark-to-market valuation of interbank assets which turns out to involve a non-standard forward-backward mechanism, since conditional probabilities of future solvency are required to determine today's balance sheets. The outcome is a form of distress contagion that acts as a stochastic volatility term in the capital of each bank, leading, endogenously, to both volatility clustering and a marked downside ‘leverage effect’. Moreover, we will see the possibility of an inverted term structure arising for the entire system solely from excessive volatility of a core group of banks. This is based on joint work with Zach Feinstein.

Period	09 Nov 2023
Event title	Vienna Seminar in Mathematical Finance and Probability
Event type	Other
Location	AustriaShow on map