Endogenous Global Risk

54 Pages Posted: 3 Feb 2022 Last revised: 15 Mar 2022

See all articles by Ji Huang

Ji Huang

The Chinese University of Hong Kong (CUHK) - Department of Economics

Hao Hu

The Chinese University of Hong Kong

Date Written: January 31, 2022


The U.S. could be the source of the global financial risk because it longs risky assets and shorts safe assets in the international capital market. This paper builds a stylized two-country model to highlight that when the developed country's risk-bearing capacity improves, it holds more foreign risky assets and issue more risk-free debt. The foreign country's risk-bearing capacity is enhanced thanks to international risk sharing. Hence, the financial health of the developed country is the key driver behind the co-movement of global capital flow, asset price, risk premiums, and volatility, and the main variable affecting the valuation effects of its external positions and the financial contagion across countries. The risk-bearing capacity of the developing country, in turn, determines its supply of safe assets, whose fluctuation influences the demand for global safe assets and risk-free rates. We model a country's endogenously time-varying risk-bearing capacity in a continuous-time macro-finance framework featuring within-country heterogeneity and the equity financing constraint.

Keywords: global financial cycle, global imbalance, valuation effects, exorbitant privilege and duty, international risk sharing, global saving and risk-free rate, financial contagion

JEL Classification: F32, F34, F41,F44, G15

Suggested Citation

Huang, Ji and Hu, Hao, Endogenous Global Risk (January 31, 2022). Available at SSRN: https://ssrn.com/abstract=4021964 or http://dx.doi.org/10.2139/ssrn.4021964

Ji Huang (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong

Hao Hu

The Chinese University of Hong Kong ( email )

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