Danielsson, Jon, Shin, Hyun Song and Zigrand, Jean-Pierre (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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Abstract
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 |
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| Official URL: | http://www.elsevier.com/locate/issn/03784266 |
| Additional Information: | © 2003 Elsevier B.V. |
| Library of Congress subject classification: | H Social Sciences > HA Statistics H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
| Journal of Economic Literature Classification System: | 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 |
| Sets: | Departments > Finance Collections > Economists Online Research centres and groups > Financial Markets Group (FMG) Research centres and groups > Systemic Risk Centre |
| Date Deposited: | 12 Sep 2008 13:53 |
| URL: | http://eprints.lse.ac.uk/16628/ |
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