Risk and Liquidity in a System Context

51 Pages Posted: 20 Sep 2007

See all articles by Hyun Song Shin

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: August 2006

Abstract

This paper explores the pricing of debt in a financial system where the assets that borrowers hold to meet their obligations include claims against other borrowers. Assessing financial claims in a system context captures features that are missing in a partial equilibrium setting. It is possible for spreads to fall as debts rise, as debt-fuelled increases in asset prices and stronger balance sheets reinforce each other. Conversely, it is possible that de-leveraging leads to increases in spreads, as is often observed during crises.

Keywords: Liquidity, Systemic Risk, Financial Stability, Asset prices, leverage, liquidity

JEL Classification: E44, G21, G22, D5, G12, M4

Suggested Citation

Shin, Hyun Song, Risk and Liquidity in a System Context (August 2006). BIS Working Paper No. 212. Available at SSRN: https://ssrn.com/abstract=898411 or http://dx.doi.org/10.2139/ssrn.898411

Hyun Song Shin (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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