Regulating Asset Price Risk

Philippe Bacchetta, Cédric Tille and Eric van Wincoop

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: There has been a long debate about whether speculators are stabilizing or not. We consider a model where speculators have a stabilizing role in normal times, but may also provoke large risk panics. The very feature that makes arbitrageurs liquidity providers in normal times, namely their tolerance of risk, enables a large increase in asset price risk during a financial panic. We show that a policy that discourages balance sheet risk reduces the magnitude of financial panics, as well as asset price risk in both normal and panic states.

Keywords: asset pricing; risk management; leverage (search for similar items in EconPapers)
JEL-codes: E44 G11 G18 (search for similar items in EconPapers)
Pages: 6 pages
Date: 2011-01
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Published in American Economic Review, Papers and Proceedings 101, May 2011, pp. 410-412

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http://www.hec.unil.ch/deep/textes/11.02.pdf (application/pdf)

Related works:
Journal Article: Regulating Asset Price Risk (2011)
Working Paper: Regulating Asset Price Risk (2011)
Working Paper: Regulating Asset Price Risk (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:11.02

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