11 Pages Posted: 17 Feb 2011 Last revised: 23 Feb 2011
Date Written: January 1, 2011
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
Bacchetta, Philippe and Tille, Cédric and van Wincoop, Eric, Regulating Asset Price Risk (January 1, 2011). Swiss Finance Institute Research Paper No. 11-04. Available at SSRN: https://ssrn.com/abstract=1762761 or http://dx.doi.org/10.2139/ssrn.1762761