Regulation Simulation
European Journal of Finance and Banking Research, Vol. 2, No. 2, pp.1-12, 2009
10 Pages Posted: 21 Jul 2009
Date Written: July 15, 2009
Abstract
A deterministic trading strategy by a representative investor on a single market asset, which generates complex and realistic returns with its first four moments similar to the empirical values of European stock indices, is used to simulate the effects of financial regulation that either pricks bubbles, props up crashes, or both. The results suggest that regulation makes the market process appear more Gaussian and less complex, with the difference more pronounced for more frequent intervention, though particular periods can be worse than the non-regulated version, and that pricking bubbles and propping up crashes are not symmetrical.
Keywords: determinism, complexity, regulation, bubbles, crashes
JEL Classification: G18, G01, G19
Suggested Citation: Suggested Citation