Relative Risk Aversion and the Transmission of Financial Crises

Melisso Boschi, Aditya Goenka
2007 Social Science Research Network  
We study how investor behaviour a¤ects the transmission of ...nancial 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 e¤ect and for contagion through changes in fundamentals. The investor behaviour can lead to the transmission of ...nancial crises even in the absence of the competitiveness
more » ... , and makes multiple equilibria more likely. The possible stabilization e¤ects of capital controls and a Tobin tax on the international transmission of ...nancial crises are also studied.
doi:10.2139/ssrn.1078468 fatcat:nsdk3xb6tvc7toy5bua6vit2n4