Risk pooling, leverage, and the business cycle
- This paper studies the impact of financial sector size and leverage on business cycles and risk-free rates dynamics. We model a general equilibrium productive economy where financial intermediaries provide costly risk mitigation to households by pooling the idiosyncratic risks of their investment activities. We find that leverage amplifies variations of intermediaries’ relative size, but may also mitigate the business cycle. Moreover, it makes risk-free rates pro-cyclical. Households benefit the most when the financial sector is neither too small, thus avoiding high consumption fluctuations and costly mitigation, nor too big, so that fewer resources are lost after intermediation costs.
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| Author: | Pietro Dindo, Andrea Modena, Loriana PelizzonORCiDGND |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-533710 |
| DOI: | https://doi.org/10.2139/ssrn.3560852 |
| Parent Title (English): | SAFE working paper series ; No. 271 |
| Series (Serial Number): | SAFE working paper (271) |
| Publisher: | SAFE |
| Place of publication: | Frankfurt am Main |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2020 |
| Year of first Publication: | 2020 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2020/03/30 |
| Tag: | Business Cycle; Frictions; Leverage; Mitigation; Risk Pooling |
| Issue: | This version: 25th February 2020 |
| Page Number: | 73 |
| HeBIS-PPN: | 46399261X |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
| Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
| Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
