Asset Price Dynamics with Value-at-Risk Constrained Traders

Jean-Pierre Zigrand (j.p.zigrand@lse.ac.uk), Jon Danielsson and Hyun Song Shin

FMG Discussion Papers from Financial Markets Group

Abstract: Risk management systems in current use treat the statistical relations governing asset returns as being exogenous, and attempt to estimate risk only by reference to historical data. These systems fail to take into account the feedback effect in which trading decisions impinge on prices. We investigate the consequences for asset price dynamics of the widespread adoption of such techniques. We illustrate through simulations of a general equilibrium model that, as compared to the case when such techniques are not used, prices lower, have time paths with deeper and longer troughs, as well as a greater degree of estimated volatility. The magnitudes can sometimes be considerable. Far from promoting stability, widespread adoption of such techniques may have the perverse effect of exacerbating financial instability.

Date: 2001-10
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp394.pdf (application/pdf)

Related works:
Working Paper: Asset price dynamics with value-at-risk constrained traders (2001)
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:fmg:fmgdps:dp394

Access Statistics for this paper

More papers in FMG Discussion Papers from Financial Markets Group
Bibliographic data for series maintained by The FMG Administration (fmg@lse.ac.uk).