Danielsson, Jon 
ORCID: 0009-0006-9844-7960, 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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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 |
|---|---|
| Official URL: | http://www.elsevier.com/locate/issn/03784266 |
| 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: | 01 Oct 2024 03:32 |
| URI: | http://eprints.lse.ac.uk/id/eprint/16628 |
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