Asset price dynamics with value-at-risk constrained traders

Danielsson, Jon ORCID: 0009-0006-9844-7960, Shin, Hyun Song and Zigrand, Jean-Pierre ORCID: 0000-0002-7784-4231 (2001) Asset price dynamics with value-at-risk constrained traders. Financial Markets Group Discussion Papers (394). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

Risk management systems in current use treat the statistical relations governing asset returns as being exogenous, and attempt to estimate risk only by reference to historical data. These systems fail to take into account the feedback effect in which trading decisions impinge on prices. We investigate the consequences for asset price dynamics of the widespread adoption of such techniques. We illustrate through simulations of a general equilibrium model that, as compared to the case when such techniques are not used, prices are lower, have time paths with deeper and longer troughs, as well as a greater degree of estimated volatility. The magnitudes can sometimes be considerable. Far from promoting stability, widespread adoption of such techniques may have the perverse effect of exacerbating financial instability.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2001 The Authors
Divisions:	Finance Systemic Risk Centre
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G10 - General G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
Date Deposited:	04 Jul 2023 09:12
Last Modified:	01 Oct 2024 04:04
URI:	http://eprints.lse.ac.uk/id/eprint/119092

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