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The co-movement of asset returns and the micro-macro focus of prudential oversight

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  • Majnoni, Giovanni

Abstract

The integration of micro-prudential oversight with the macro-approach to financial stability -- long in the making -- raises several issues of coordination of regulatory responsibilities. This paper argues that a decomposition of the covariance of asset returns into an endogenous volatility component -- which can be reduced -- and an exogenous volatility component -- which we have to live with -- helps address these coordination issues and provides the basis for financial health diagnostics and supervisory responses to observed symptoms of financial instability. By linking risk origination and risk control, the paper may also contribute to the search for an operational definition of the term"macro-prudential."

Suggested Citation

  • Majnoni, Giovanni, 2010. "The co-movement of asset returns and the micro-macro focus of prudential oversight," Policy Research Working Paper Series 5456, The World Bank.
    • Handle: RePEc:wbk:wbrwps:5456
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    References listed on IDEAS

    as
    1. Campbell, John Y, 1994. "The New Palgrave Dictionary of Money and Finance," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 667-673, June.
    2. Ricardo J Caballero, 2010. "Sudden Financial Arrest," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(1), pages 6-36, August.
    3. Augusto De La Torre & Alain Ize, 2010. "Regulatory Reform: Integrating Paradigms," International Finance, Wiley Blackwell, vol. 13(1), pages 109-139, March.
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    Cited by:

    1. Majnoni, Giovanni & Powell, Andrew, 2011. "On Endogenous Risk, the Amplification Effects of Financial Systems and Macro Prudential Policies," IDB Publications (Working Papers) 3804, Inter-American Development Bank.
    2. VanHoose, David, 2011. "Systemic Risk and Macroprudential Bank Regulation: A Critical Appraisal," Journal of Financial Transformation, Capco Institute, vol. 33, pages 45-60.

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    Keywords

    Mutual Funds; Debt Markets; Markets and Market Access; Emerging Markets; Labor Policies;
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