The Intended and Unintended Consequences of Financial-Market Regulations: A General Equilibrium Analysis

49 Pages Posted: 25 Jan 2016 Last revised: 5 May 2016

See all articles by Adrian Buss

Adrian Buss

INSEAD - Finance; Centre for Economic Policy Research (CEPR)

Bernard Dumas

INSEAD; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Raman Uppal

EDHEC Business School; Centre for Economic Policy Research (CEPR)

Grigory Vilkov

Frankfurt School of Finance & Management

Multiple version iconThere are 2 versions of this paper

Date Written: March 14, 2016

Abstract

In a production economy with trade in financial markets motivated by the desire to share labor-income risk and to speculate, we show that speculation increases volatility of asset returns and investment growth, increases the equity risk premium, and reduces welfare. Regulatory measures, such as constraints on stock positions, borrowing constraints, and the Tobin tax have similar effects on financial and macroeconomic variables. However, borrowing constraints and the Tobin tax are more successful than constraints on stock positions at improving welfare because they substantially reduce speculative trading without impairing excessively risk-sharing trades.

Keywords: Tobin tax, borrowing constraints, short-sale constraints, stock market volatility, incomplete markets, differences of opinion

JEL Classification: G01, G18, G12, E44

Suggested Citation

Buss, Adrian and Dumas, Bernard and Uppal, Raman and Vilkov, Grigory, The Intended and Unintended Consequences of Financial-Market Regulations: A General Equilibrium Analysis (March 14, 2016). INSEAD Working Paper No. 2016/29/FIN. Available at SSRN: https://ssrn.com/abstract=2721730 or http://dx.doi.org/10.2139/ssrn.2721730

Adrian Buss

INSEAD - Finance ( email )

Boulevard de Constance
Fontainebleau Cedex, 77305
France
+33 160 72 44 84 (Phone)
+33 160 72 40 45 (Fax)

HOME PAGE: http://sites.google.com/view/abuss

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Bernard Dumas

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 60 72 49 92 (Phone)
+33 1 60 72 40 45 (Fax)

HOME PAGE: http://www.insead.fr/~dumas/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Raman Uppal

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Centre for Economic Policy Research (CEPR)

90-98 Goswell Road
London, EC1V 7RR
United Kingdom

Grigory Vilkov (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.vilkov.net

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