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The Intended and Unintended Consequences of Financial-Market Regulations: A General Equilibrium Analysis

Author

Listed:
  • Adrian Buss
  • Bernard Dumas
  • Raman Uppal
  • Grigory Vilkov

Abstract

In a production economy with trade in financial markets motivated by the desire to share labor-income risk and to speculate, we show that speculation increases volatility of asset returns and investment growth, increases the equity risk premium, and reduces welfare. Regulatory measures, such as constraints on stock positions, borrowing constraints, and the Tobin tax have similar e ects on financial and macroeconomic variables. However, borrowing constraints and the Tobin tax are more successful than constraints on stock positions at improving welfare because they substantially reduce speculative trading without impairing excessively risk-sharing trades.

Suggested Citation

  • Adrian Buss & Bernard Dumas & Raman Uppal & Grigory Vilkov, 2016. "The Intended and Unintended Consequences of Financial-Market Regulations: A General Equilibrium Analysis," Carlo Alberto Notebooks 449, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:449
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    Cited by:

    1. Martin Herdegen & Johannes Muhle-Karbe & Dylan Possamaï, 2021. "Equilibrium asset pricing with transaction costs," Finance and Stochastics, Springer, vol. 25(2), pages 231-275, April.
    2. Johannes Muhle-Karbe & Marcel Nutz & Xiaowei Tan, 2019. "Asset Pricing with Heterogeneous Beliefs and Illiquidity," Papers 1905.05730, arXiv.org, revised Mar 2020.
    3. Saki Bigio & Eduardo Zilberman, 2020. "Speculation-Driven Business Cycles," Working Papers Central Bank of Chile 865, Central Bank of Chile.
    4. Bo Liu & Lei Lu & Congming Mu & Jinqiang Yang, 2021. "Heterogeneous preferences, investment, and asset pricing," Financial Management, Financial Management Association International, vol. 50(4), pages 1169-1193, December.
    5. Elyès Jouini, 2023. "Belief Dispersion and Convex Cost of Adjustment in the Stock Market and in the Real Economy," Management Science, INFORMS, vol. 69(7), pages 4190-4209, July.
    6. Chabakauri, Georgy & Rytchkov, Oleg, 2021. "Asset pricing with index investing," Journal of Financial Economics, Elsevier, vol. 141(1), pages 195-216.
    7. Steven D. Baker & Burton Hollifield & Emilio Osambela, 2018. "Preventing Controversial Catastrophes," Finance and Economics Discussion Series 2018-052, Board of Governors of the Federal Reserve System (U.S.).
    8. Bizzarri, Matteo & d’Arienzo, Daniele, 2024. "The social value of overreaction to information," Journal of Mathematical Economics, Elsevier, vol. 115(C).
    9. Yin, Zhichao & Peng, Hongfeng & Xiao, Weiguo & Xiao, Zumian, 2022. "Capital control and monetary policy coordination: Tobin tax revisited," Research in International Business and Finance, Elsevier, vol. 59(C).
    10. Johannes Binswanger & Anja Garbely & Manuel Oechslin, 2023. "Investor beliefs about transformative innovations under uncertainty," Economica, London School of Economics and Political Science, vol. 90(360), pages 1119-1144, October.
    11. Chabakauri, Georgy & Han, Brandon Yueyang, 2020. "Collateral constraints and asset prices," Journal of Financial Economics, Elsevier, vol. 138(3), pages 754-776.
    12. Xiaoping Li & Chunyang Zhou, 2024. "Tobin Tax, Carry Trade, and the Exchange Rate Dynamics," Computational Economics, Springer;Society for Computational Economics, vol. 63(4), pages 1627-1647, April.
    13. Steven D Baker & Burton Hollifield & Emilio Osambela, 2020. "Preventing Controversial Catastrophes," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 10(1), pages 1-60.
    14. Motolese, Maurizio & Nakata, Hiroyuki, 2024. "Are macroeconomic indices fool's gold?," Journal of Economic Behavior & Organization, Elsevier, vol. 217(C), pages 240-260.
    15. Martin Herdegen & Johannes Muhle-Karbe & Dylan Possamai, 2019. "Equilibrium Asset Pricing with Transaction Costs," Papers 1901.10989, arXiv.org, revised Sep 2020.
    16. Maurizio MOTOLESE & Hiroyuki NAKATA, 2016. "Endogenous Fluctuations and Social Welfare under Credit Constraints and Heterogeneous Beliefs," Discussion papers 16082, Research Institute of Economy, Trade and Industry (RIETI).
    17. Johannes Muhle‐Karbe & Marcel Nutz & Xiaowei Tan, 2020. "Asset pricing with heterogeneous beliefs and illiquidity," Mathematical Finance, Wiley Blackwell, vol. 30(4), pages 1392-1421, October.

    More about this item

    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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