Equilibrium Impact of Value-at-Risk Regulation

64 Pages Posted: 14 Nov 2002

See all articles by Markus Leippold

Markus Leippold

University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Paolo Vanini

University of Basel

Fabio Trojani

Swiss Finance Institute; University of Geneva

Date Written: September 16, 2003

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.

Keywords: Value-at-Risk, Stochastic Opportunity Set, Regulatory Policy, Dynamic Financial Equilibria, Perturbation Theory

JEL Classification: G11, G12, G28, D92, C60, C61

Suggested Citation

Leippold, Markus and Vanini, Paolo and Trojani, Fabio, Equilibrium Impact of Value-at-Risk Regulation (September 16, 2003). EFA 2002 Berlin Meetings Discussion Paper. Available at SSRN: https://ssrn.com/abstract=302589 or http://dx.doi.org/10.2139/ssrn.302589

Markus Leippold

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Paolo Vanini (Contact Author)

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Fabio Trojani

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva ( email )

Geneva
Switzerland

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