This paper provides a macroeconomic perspective for government interventions in banking crises. Such crises occur when a large number of banks fall to meet capital requirements or are insolvent. Using a macroeconomic model with financial intermediation, our analysis suggests that strict...

This paper studies the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping generation model subject to repeated macroeconomic shocks. We show that even if banks fully...

This paper develops an adaptive learning scheme for an asset market with heterogeneous traders who are characterized by linear mean-variance preferences. We introduce the concept of a perfect forecasting rule which generates rational expectations for fundamentalists in the presence of investors...

We investigate a banking system subject to repeated macroeconomic shocks and show that without deposit rate control, the banking system collapses with certainty. Any initial level of reserves will delay the collapse but not avoid it. Even without a banking collapse, the economy still converges...

This paper studies the aggregation of a downside risk measure introduced by Fishburn (1977). Properties of aggregated downside risk are examined and compared to classical risk measures such as standard deviation and value-at-risk. The notion of downside-efficient portfolios that maximize the...

The paper analyzes double-sided Bertrand competition of banks, where borrowers invest in risky projects and may default on loans. Borrowers and depositors are allowed to switch market-sides and banks may ration loan applicants. The outcome is Walrasian, i.e. expected revenue on loans equals...

This article considers a financial market in which asset returns are stipulated by an exogenous stochastic process. It argues that the \emph{market portfolio} should be replaced by a \emph{modified market portfolio} which by construction is mean-variance efficient. All classical tenets of the...

This paper investigates the effectiveness of capital requirements in reducing the default risk of portfolio-managing financial intermediaries. It is shown that the effectiveness depends, in essence, on the risk preferences of the intermediary and market conditions. The central result is that any...

Catastrophe bonds are insurance linked securities that transfer catastrophe risks from the insurance industry to financial markets. These risks cannot be hedged with ordinary financial securities. Due to market incompleteness, arbitrage pricing methods generally do not yield uniquely determined...