Asymmetric price movements and borrowing constraints : a rational expectations equilibrum model of crises, contagion, and confusion

Deskripsi

This study proposes a rational expectations equilibrum model of crises and contagion in an economy with information asymmetry and borrowing constraints. Consistent with empirical observations, the model finds: (1) Crises can be caused by small shocks to fundamentals ; (2) market return distributions are asymmetric ; and (3) correlations among asset returns tend to increase during crashes. The model also predicts : (1) Crises and contagion are likely to occur after small shocks in the intermediate price region ; (2) the skewness of asset price distributions increases with information asymmetry and borrowing constraints ; and (3) crises can spread through imvestor borrowing constraints..Printed Journal