Zigrand, Jean-Pierre 
ORCID: 0000-0002-7784-4231 and Danielsson, Jon ORCID: 0009-0006-9844-7960
(2001)
What happens when you regulate risk?: evidence from a simple equilibrium model.
Financial Markets Group Discussion Papers (393).
Financial Markets Group, The London School of Economics and Political Science, London, UK.
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Abstract
The implications of Value-at-Risk regulations are analyzed in a CARA-normal general equilibrium model. Financial institutions are heterogeneous in risk preferences, wealth and the degree of supervision. Regulatory risk constraints lower the probability of one form of a systemic crisis, at the expense of more volatile asset prices, less liquidity, and the amplification of downward price movements. This can be viewed as a consequence of the endogenously changing risk appetite of financial institutions induced by the regulatory constraints. Finally, the Value-at-Risk constraints may prevent market clearing altogether. The role of unregulated institutions (hedge-funds) is considered. The findings are illustrated with an application to the 1987 and 1998 crises.
| Item Type: | Monograph (Discussion Paper) |
|---|---|
| Official URL: | https://www.fmg.ac.uk/ |
| Additional Information: | © 2001 The Authors |
| Divisions: | Financial Markets Group |
| Subjects: | H Social Sciences > HG Finance H Social Sciences > HB Economic Theory |
| JEL classification: | G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D50 - General G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation G - Financial Economics > G2 - Financial Institutions and Services > G20 - General |
| Date Deposited: | 06 Jan 2010 13:48 |
| Last Modified: | 11 Dec 2024 18:30 |
| URI: | http://eprints.lse.ac.uk/id/eprint/25069 |
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