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The impact of risk regulation on price dynamics

Danielsson, Jon, Shin, Hyun Song and Zigrand, Jean-Pierre ORCID: 0000-0002-7784-4231 (2004) The impact of risk regulation on price dynamics. Journal of Banking and Finance, 28 (5). pp. 1069-1087. ISSN 0378-4266

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Identification Number: 10.1016/S0378-4266(03)00113-4


Most financial risk regulations assume that asset returns are exogenous, where risk is estimated from historical data. This assumption fails to take into account the feedback effect of trading decisions on prices. We investigate the consequences of risk constrained trading by means of simulations of a general equilibrium model with a value-at-risk constraint and compare the results to the case when risk constraints are not present. Prices are lower on average in the presence of risk regulation, while volatility is higher. Risk regulation may have the perverse effect of exacerbating price fluctuations.

Item Type: Article
Official URL:
Additional Information: © 2003 Elsevier B.V.
Divisions: Finance
Financial Markets Group
Systemic Risk Centre
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C15 - Statistical Simulation Methods; Monte Carlo Methods; Bootstrap Methods
G - Financial Economics > G1 - General Financial Markets
G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
Date Deposited: 12 Sep 2008 13:53
Last Modified: 20 Oct 2021 01:38

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