Self-Fulfilling Risk Panics

Philippe Bacchetta, Cédric Tille and Eric van Wincoop

American Economic Review, 2012, vol. 102, issue 7, 3674-3700

Abstract: Recent crises have seen large spikes in asset price risk. We propose an explanation for such panics based on self-fulfilling shifts in beliefs about risk. A negative link between the current level and the future risk of an asset price leads to a circular relationship between the stochastic process of asset price risk and the price itself. Self-fulfilling shifts in perceived risk can be coordinated around a pure sunspot or around a macro fundamental. In a risk panic, a macro fundamental can be a focal point that affects both the magnitude of the panic and subsequent shifts in perceived risk.

JEL-codes: D81 E44 G01 G12 (search for similar items in EconPapers)
Date: 2012
Note: DOI: 10.1257/aer.102.7.3674
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Citations: View citations in EconPapers (40)

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Related works:
Working Paper: Self-Fulfilling Risk Panics (2011)
Working Paper: Self-fulfilling risk panics (2011)
Working Paper: Self-Fulfilling Risk Panics (2010)
Working Paper: Self-Fulfilling Risk Panics (2010)
Working Paper: Self-Fulfilling Risk Panics (2010)
Working Paper: Self-Fulfilling Risk Panics (2010)
Working Paper: Self-Fulfilling Risk Panics (2010)
Working Paper: Self-Fulfilling Risk Panics (2010)
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