by Emily Eisner

This project aims to understand the role of value-at-risk (VaR) constraints and bank risk-taking behavior in determining entry and exit into global asset markets. The model informs the aggregate risk of the global financial markets and informs macroeconomic dynamics that depend on financial frictions in intermediation. The project develops an open economy model of financial markets based on the closed economy model in Coimbra and Rey (2017). In the extended model, financial intermediaries, which are heterogeneous in their VaR constraint as in Coimbra and Rey (2017), have an opportunity to invest in foreign assets. The model predicts the risk-taking composition and international asset composition of financial intermediaries under different interest rate environments.