Relative Risk Aversion and the Transmission of Financial Crises

CAMA Working Paper 28/2007

28 Pages Posted: 27 Dec 2007 Last revised: 11 Nov 2008

See all articles by Melisso Boschi

Melisso Boschi

Centre for Applied Macroeconomic Analysis (CAMA)

Aditya Goenka

affiliation not provided to SSRN

Date Written: December 1, 2007

Abstract

We study how investor behaviour affects the transmission of financial crises. If investors exhibit decreasing relative risk aversion, then negative wealth shocks increase the risk premium required to hold risky assets. We integrate this into a second generation model of currency crises which allows for a competitiveness effect and for contagion through changes in fundamentals. The investor behaviour can lead to the transmission of financial crises even in the absence of the competitiveness effect, and makes multiple equilibria more likely. The possible stabilization effects of capital controls and a Tobin tax on the international transmission of financial crises are also studied.

Keywords: Financial crises, contagion, wealth effects, international asset pricing, relative risk aversion, capital controls, Tobin tax

JEL Classification: D91, F31, F32, G11, G15

Suggested Citation

Boschi, Melisso and Goenka, Aditya, Relative Risk Aversion and the Transmission of Financial Crises (December 1, 2007). CAMA Working Paper 28/2007, Available at SSRN: https://ssrn.com/abstract=1078468 or http://dx.doi.org/10.2139/ssrn.1078468

Melisso Boschi (Contact Author)

Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Aditya Goenka

affiliation not provided to SSRN ( email )

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