Regulating Asset Price Risk

Philippe Bacchetta, Cédric Tille and Eric van Wincoop

American Economic Review, 2011, vol. 101, issue 3, 410-12

Abstract: There has been a long debate about whether speculators are stabilizing or not. We consider a model where speculators have a stabilizing role in normal times, but may also provoke large risk panics. The very feature that makes arbitrageurs liquidity providers in normal times, namely their tolerance of risk, enables a large increase in asset price risk during a financial panic. We show that a policy that discourages balance sheet risk reduces the magnitude of financial panics, as well as asset price risk in both normal and panic states.

Date: 2011
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Working Paper: Regulating Asset Price Risk (2011)
Working Paper: Regulating Asset Price Risk (2011)
Working Paper: Regulating Asset Price Risk (2011)
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