Regulating asset price risk

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.


Publication infos:
Geneva, Graduate Institute of International and Development Studies, 2011
Publication year:
2011
Number of pages:
6 p.
Collection:
HEID Working Paper ; 2/2011



 Record created 2011-08-09, last modified 2019-09-30

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