Risk Shifting with Fuzzy Capital Constraints

Simon Dubecq (), Benoit Mojon and Xavier Ragot

International Journal of Central Banking, 2015, vol. 11, issue 1, 71-101

Abstract: We construct a model where risk shifting can be moderated by capital requirements. Imperfect information about the level of capital per unit of risk, however, introduces uncertainty about the risk exposure of intermediaries. Over-estimation of the capital held by financial intermediaries, or the extent of regulatory arbitrage, may induce households to wrongly infer from higher asset prices that the fundamentals of risky assets have improved. This mechanism can notably explain the low risk premia paid by U.S. financial intermediaries between 2000 and 2007 in spite of their increased exposure to risk through higher leverage. Moreover, the lower the level of the risk-free interest rate, the more risk is under-estimated.

JEL-codes: E52 G14 G21 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://www.ijcb.org/journal/ijcb15q1a3.pdf (application/pdf)
http://www.ijcb.org/journal/ijcb15q1a3.htm (text/html)

Related works:
Working Paper: Risk Shifting with Fuzzy Capital Constraints (2015)
Working Paper: Risk Shifting with Fuzzy Capital Constraints (2015)
Working Paper: Risk Shifting with Fuzzy Capital Constraints (2015)
Working Paper: Risk Shifting with Fuzzy Capital Constraints (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2015:q:1:a:3

Access Statistics for this article

International Journal of Central Banking is currently edited by Loretta J. Mester

More articles in International Journal of Central Banking from International Journal of Central Banking
Bibliographic data for series maintained by Bank for International Settlements ().