TY  - JOUR
AU  - He,Zhiguo
AU  - Krishnamurthy,Arvind
TI  - A Model of Capital and Crises
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14366
PY  - 2008
Y2  - September 2008
UR  - http://www.nber.org/papers/w14366
L1  - http://www.nber.org/papers/w14366.pdf
N1  - Author contact info:
Zhiguo He
University of Chicago
Booth School of Business
E-Mail: Zhiguo.He@ChicagoBooth.edu

Arvind Krishnamurthy
Kellogg School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-2671
Fax: 847/491-5719
E-Mail: a-krishnamurthy@northwestern.edu
AB  - We develop a model in which the capital of the intermediary sector plays a critical role in determining asset prices. The model is cast within a dynamic general equilibrium economy, and the role for intermediation is derived endogenously based on optimal contracting considerations. Low intermediary capital reduces the risk-bearing capacity of the marginal investor. We show how this force helps to explain patterns during financial crises. The model replicates the observed rise during crises in Sharpe ratios, conditional volatility, correlation in price movements of assets held by the intermediary sector, and fall in riskless interest rates. 
ER  -