Regulating Asset Price Risk
11 Pages Posted: 17 Feb 2011 Last revised: 23 Feb 2011
Date Written: January 1, 2011
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
JEL Classification: E44, G11, G18
Suggested Citation: Suggested Citation
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