Does Risk Management Make Financial Markets Riskier?

Ian R. Harper, Joachim G. Keller and Christian M. Pfeil
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Ian R. Harper: Melbourne Business School
Joachim G. Keller: University of Saarland
Christian M. Pfeil: University of Leipzig

A chapter in Risk Management, 2005, pp 765-783 from Springer

Abstract: Abstract Value-at-risk figures are calculated on the basis of historical market volatility and capital requirements are determined on the basis of these calculations. A rise in historical market volatility leads to an increase of the regulatory capital requirement. If market participants engage in forced selling to decrease risk exposure to meet imposed capital requirements, volatility may be amplified. Risk management on the individual firm level may thus actually lead to an increase of market volatility in the economy as a whole and the regulatory aim to limit the chances of systemic effects is undermined. We present an informal exposition of this argument as well as supporting empirical and anecdotal evidence.

Keywords: Risk Management; Value-At-Risk; Volatility; Systemic Risk; Prudential Regulations (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-540-26993-9_39

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DOI: 10.1007/3-540-26993-2_39

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