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Regulating Asset Price Risk

Author

Listed:
  • Philippe Bacchetta
  • Cedric Tille
  • Eric van Wincoop

Abstract

There has been a long debate about whether speculators are stabilizing or not. We consider a model where speculators have a stabilizing role in normal times, but may also provoke large risk panics. The very feature that makes arbitrageurs liquidity providers in normal times, namely their tolerance of risk, enables a large increase in asset price risk during a financial panic. We show that a policy that discourages balance sheet risk reduces the magnitude of financial panics, as well as asset price risk in both normal and panic states.

Suggested Citation

  • Philippe Bacchetta & Cedric Tille & Eric van Wincoop, 2011. "Regulating Asset Price Risk," American Economic Review, American Economic Association, vol. 101(3), pages 410-412, May.
  • Handle: RePEc:aea:aecrev:v:101:y:2011:i:3:p:410-12
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.3.410
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    References listed on IDEAS

    as
    1. Stephen Morris & Hyun Song Shin, 2008. "Financial Regulation in a System Context," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 229-274.
    2. Philippe Bacchetta & Cédric Tille & Eric van Wincoop, 2012. "Self-Fulfilling Risk Panics," American Economic Review, American Economic Association, vol. 102(7), pages 3674-3700, December.
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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