The Financial Origins of Non-Fundamental Risk

Authors

Sushant Acharya

Keshav Dogra

Download PDF
(998 KB)

2023-20 | May 1, 2023

We formalize the idea that the financial sector can be a source of non-fundamental risk. Households’ desire to hedge against price volatility can generate price volatility in equilibrium, even absent fundamental risk. Fearing that asset prices may fall, risk-averse households demand safe assets from leveraged intermediaries, whose issuance of safe assets exposes the economy to self-fulfilling fire sales. Policy can eliminate nonfundamental risk by (i) increasing the supply of publicly backed safe assets, through issuing government debt or bailing out intermediaries, or (ii) reducing the demand for safe assets, through social insurance or by acting as a market maker of last resort.

Article Citation

Dogra, Keshav, Sanjay R. Singh, and Sushant Acharya. 2023. “The Financial Origins of Non-Fundamental Risk,” Federal Reserve Bank of San Francisco Working Paper 2023-20. Available at https://doi.org/10.24148/wp2023-20

About the Author
Abstract image representing a seat vacancy.
Sanjay R. Singh is a senior economist in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Sanjay R. Singh