What happens when you regulate risk?: evidence from a simple equilibrium model

Jean-Pierre Zigrand and Jon Danielsson

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The implications of Value-at-Risk regulations are analyzed in a CARA-normal general equilibrium model. Financial institutions are heterogeneous in risk preferences, wealth and the degree of supervision. Regulatory risk constraints lower the probability of one form of a systemic crisis, at the expense of more volatile asset prices, less liquidity, and the amplification of downward price movements. This can be viewed as a consequence of the endogenously changing risk appetite of financial institutions induced by the regulatory constraints. Finally, the Value-at-Risk constraints may prevent market clearing altogether. The role of unregulated institutions (hedge-funds) is considered. The findings are illustrated with an application to the 1987 and 1998 crises.

JEL-codes: D50 G12 G18 G20 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2001-10-01
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Citations: View citations in EconPapers (5)

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http://eprints.lse.ac.uk/25069/ Open access version. (application/pdf)

Related works:
Working Paper: What Happens When You Regulate Risk? Evidence from a Simple Equilibrium Model (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:25069

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