The origin of risk
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From the QJE, by Alexandr Kopytov, Mathieu Taschereau-Dumouchel, and Zebang Xu:
We propose a tractable model in which risk, at both the micro and macro levels, is endogenous and driven by incentives. In the model, each firm chooses the mean and the variance of its productivity process, as well as how it covaries with the productivity of other firms. Aggregate risk arises when firms select productivity processes that are correlated with one another. The theory predicts that larger firms and those
We propose a tractable model in which risk, at both the micro and macro levels, is endogenous and driven by incentives. In the model, each firm chooses the mean and the variance of its productivity process, as well as how it covaries with the productivity of other firms. Aggregate risk arises when firms select productivity processes that are correlated with one another. The theory predicts that larger firms and those
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