Asymmetric Price Movements and Borrowing Constraints : A Rational Expectations Equilibrium Model of Crises , Contagion , and Confusion

@inproceedings{Yuan2004AsymmetricPM,
  title={Asymmetric Price Movements and Borrowing Constraints : A Rational Expectations Equilibrium Model of Crises , Contagion , and Confusion},
  author={Kathy Yuan},
  year={2004}
}
This study proposes a rational expectations equilibrium model of crises and contagion in an economy with information asymmetry and borrowing constraints. Consistent with empirical observations, the model finds: (1) Crises can be caused by small shocks to fundamentals; (2) market return distributions are asymmetric; and (3) correlations among asset returns tend to increase during crashes. The model also predicts: (1) Crises and contagion are likely to occur after small shocks in the intermediate… CONTINUE READING
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