Regulating Asset Price Risk
University of Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute; Centre for Economic Policy Research (CEPR)
Graduate Institute of International and Development Studies (HEI)
Eric van Wincoop
University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)
January 1, 2011
Swiss Finance Institute Research Paper No. 11-04
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.
Number of Pages in PDF File: 11
Keywords: Asset Pricing, Risk Management, Leverage
JEL Classification: E44, G11, G18
Date posted: February 17, 2011 ; Last revised: February 23, 2011
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