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Equilibrium Impact of Value-at-Risk RegulationMarkus LeippoldUniversity of Zurich - Department of Banking and Finance; Swiss Finance Institute; University of Zurich - Faculty of Economics, Business Administration and Information Technology Paolo VaniniZurich Cantonal Bank; University of Basel Fabio TrojaniSwiss Finance Institute; University of Lugano September 16, 2003 EFA 2002 Berlin Meetings Discussion Paper Abstract: We study the partial and general equilibrium implications of value-at-risk (VaR) regulation in continuous-time economies with intermediate expenditure, stochastic opportunity set, and heterogeneous attitudes to risk. Our findings show that because of an anticipatory effect of VaR constraints on the optimal hedging demand, the partial equilibrium incentives of VaR regulation can lead banks to increase their risk exposure in high-volatility states. In general equilibrium, VaR constraints can produce unambiguously lower interest rates and higher equity Sharpe ratios. The VaR impact on equity volatility and equity expected returns is ambiguous.
Number of Pages in PDF File: 64 Keywords: Value-at-Risk, Stochastic Opportunity Set, Regulatory Policy, Dynamic Financial Equilibria, Perturbation Theory JEL Classification: G11, G12, G28, D92, C60, C61 working papers seriesDate posted: November 14, 2002Suggested CitationContact Information
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