We review some recent research that explores the relationship between asset-price volatility and financial fragility when markets and contracts are incomplete. (JEL: E5, G2) Copyright (c) 2005 The European Economic Association.

Empirical evidence suggests that banking panics are a natural outgrowth of the business cycle. In other words panics are not simply the result of "sunspots" or self-fulfilling prophecies. Panics occur when depositors perceive that the returns on the bank's assets are going to be unusually low....

Flawed government policies have been offered as an explanation for currency crises in most of the previous literature. With few exceptions, the role of the banking system is ignored. Empirical evidence suggests that in recent decades banking crises and currency crises have been linked. A model...

It is generally agreed that speculators can make profits from insider trading or from the release of false information. Both forms of stock-price manipulation have now been made illegal. In this article, the authors ask whether it is possible to make profits from a different kind of...

The authors describe a model of general equilibrium with incomplete markets in which firms can innovate by issuing arbitrary, costly securities. When short sales are prohibited, firms behave competitively and equilibrium is efficient. When short sales are allowed, these classical properties may...

What causes a financial crisis? Can financial crises be anticipated or even avoided? What can be done to lessen their impact? Should governments and international institutions intervene? Or should financial crises be left to run their course? In the aftermath of the Asian financial crisis, many...

Relationships between intermediaries and their customers have become increasingly important in recent years. This paper argues that the need for costly ex ante information acquisition and analysis is a major barrier to the participation of investors and firms in sophisticated markets. Long-term...

Most analyses of banking crises assume that banks use real contracts. However, in practice contracts are nominal and this is what is assumed here. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. We show that, with...