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

52 Pages Posted: 10 Jul 2017

See all articles by Jonas Heipertz

Jonas Heipertz

Paris School of Economics (PSE)

Amine Ouazad

HEC Montréal

Romain G. Rancière

University of Southern California

Natacha Valla

European Union - European Investment Bank; European Central Bank (ECB); Banque de France

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Date Written: July 2017

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.

Keywords: Asset Pricing, Dynamic Factors., Financial Networks, General Equilibrium Model of Asset Trade, heterogenous beliefs

JEL Classification: G01, G11, G12, G15, L14

Suggested Citation

Heipertz, Jonas and Ouazad, Amine and Rancière, Romain G. and Valla, Natacha, Balance-Sheet Diversification in General Equilibrium: Identification and Network Effects (July 2017). CEPR Discussion Paper No. DP12134. Available at SSRN: https://ssrn.com/abstract=2999664

Jonas Heipertz (Contact Author)

Paris School of Economics (PSE) ( email )

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Amine Ouazad

HEC Montréal ( email )

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Romain G. Rancière

University of Southern California ( email )

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Natacha Valla

European Union - European Investment Bank ( email )

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