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Self-Fulfilling Risk Panics

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  • Philippe Bacchetta
  • Cédric Tille
  • Eric van Wincoop

Abstract

Recent crises have seen large spikes in asset price risk. We propose an explanation for such panics based on self-fulfilling shifts in beliefs about risk. A negative link between the current level and the future risk of an asset price leads to a circular relationship between the stochastic process of asset price risk and the price itself. Self-fulfilling shifts in perceived risk can be coordinated around a pure sunspot or around a macro fundamental. In a risk panic, a macro fundamental can be a focal point that affects both the magnitude of the panic and subsequent shifts in perceived risk.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 7 (December)
Pages: 3674-3700

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:7:p:3674-3700

Note: DOI: 10.1257/aer.102.7.3674
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Citations

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Cited by:
  1. Philippe Bacchetta & Cedric Tille & Eric van Wincoop, 2011. "Regulating Asset Price Risk," American Economic Review, American Economic Association, vol. 101(3), pages 410-12, May.
  2. Adrian, Tobias & Etula, Erkko & Groen, Jan J.J., 2011. "Financial amplification of foreign exchange risk premia," European Economic Review, Elsevier, vol. 55(3), pages 354-370, April.
  3. Bacchetta, Philippe & van Wincoop, Eric, 2013. "Sudden spikes in global risk," Journal of International Economics, Elsevier, vol. 89(2), pages 511-521.
  4. Driscoll, John C. & Holden, Steinar, 2014. "Behavioral Economics and Macroeconomic Models," Finance and Economics Discussion Series 2014-43, Board of Governors of the Federal Reserve System (U.S.).

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