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Impact of systemic risk regulation on optimal policies and asset prices

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  • Bernard, Carole
  • Cui, Xuecan

Abstract

Although a few systemic risk management approaches have been proposed in the literature and implemented in industry, such as stress test-based scenarios, the impact of such regulations remains unclear. In this paper, we present a theoretical framework to study the impact of systemic risk management on financial institutions’ optimal wealth policies and asset prices in equilibrium. Specifically, we study the impact of the conditional VaR (CoVaR) and systemic expected shortfall (SES) constraints and illustrate the potential adverse effects of conditional risk measures when the market is under stress. We find that a proper choice of the SES constraint, especially based on option-implied information, may effectively reduce these impacts.

Suggested Citation

  • Bernard, Carole & Cui, Xuecan, 2023. "Impact of systemic risk regulation on optimal policies and asset prices," Journal of Banking & Finance, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:jbfina:v:154:y:2023:i:c:s0378426622002011
    DOI: 10.1016/j.jbankfin.2022.106621
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    References listed on IDEAS

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    More about this item

    Keywords

    Systemic risk management; Conditional VaR (CoVaR) constraint; Systemic expected shortfall (SES); State-dependent capital requirement; Stress scenarios; Equilibrium analysis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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