Regulating Asset Price Risk
Philippe Bacchetta, Cédric Tille, Eric van Wincoop
American Economic Review · 2011 · Volume 101 · Issue 3
Abstract
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
Financial Crises, Asset Pricing, Trading volume, Bond Interest Rates, General Financial Markets: Government Policy and Regulation, Financial Institutions and Services: Government Policy and Regulation
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