Second, the model is consistent with multifactor volatility models or CGARCH e¤ects. Both endowment risk and sentiment risk are associated with instantaneous shocks associated with the idiosyncratic risk embedded in the Brownian motions present in the investors endowments. In contrast, solvency risk is associated with the binding of solvency constraints, and therefore it occurs at a lower frequency. Because the shadow price of solvency constraints alternates behavior between endogenous regimes of binding constraints and endogenous regimes of non-binding constraints, solvency risk clusters with a lower decay rate and exhibits a transient persistence. To my knowledge, this is the rst paper which nds a theoretical foundation for the.
