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Discussion Paper Details

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Title: Balance-Sheet Diversification in General Equilibrium: Identification and Network Effects

Author(s): Jonas Heipertz, Amine Ouazad, Romain Ranci�re and Natacha Valla

Publication Date: July 2017

Keyword(s): Asset Pricing, Dynamic Factors, Financial Networks, General Equilibrium Model of Asset Trade and heterogenous beliefs

Programme Area(s): Financial Economics and International Macroeconomics and Finance

Abstract: The paper uses disaggregated data on asset holdings and liabilities to estimate a general equilibrium model where each institution determines the diversification and size of the asset and liability sides of its balance-sheet. The model endogenously generates two types of financial networks: (i) a network of institutions when two institutions share common asset or liability holdings or when an institution holds an asset that is the liability of another. In both cases demand/supply decisions by one institution affect the value of other institutions' holdings/liabilities, (ii) a network of financial instruments implied by the distribution of assets and liabilities within and across institutions. A change in the price of one asset induces change in demand/supply for all other assets, thus generating price comovement. The general equilibrium analysis predicts the propagation of real, financial and regulatory shocks as well as the change in the network caused by the shock.

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Bibliographic Reference

Heipertz, J, Ouazad, A, Ranci�re, R and Valla, N. 2017. 'Balance-Sheet Diversification in General Equilibrium: Identification and Network Effects'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12134