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We address the paradox that financial innovations aimed at risk-sharing appear to have made the world riskier. Financial innovations facilitate hedging idiosyncratic risks among agents; however, aggregate risks can be hedged only with liquid assets. When risk-sharing is primitive, agents...
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),1 which leads to “fire-sale”–related pecuniaryexternalities; and bank interconnectedness (Allen and Gale2000; Kahn and Santos …
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