We formalize the idea that the financial sector can be a source of non-fundamental risk. Households' desire to hedge … against price volatility can generate price volatility in equilibrium, even absent fundamental risk. Fearing that asset prices … may fall, risk-averse households demand safe assets from leveraged intermediaries, whose issuance of safe assets exposes …

risk factors. Risk factor correlation increases when investor sentiment worsens. This suggests that corporate bond … investors change their perception of risk factors, which results in higher risk factor correlation and finally higher bond …