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Regulating Asset Price Risk

Author

Listed:
  • Philippe BACCHETTA

    (University of Lausanne, Swiss Finance Institute and CEPR)

  • Cedric TILLE

    (Graduate Institute Geneva and CEPR)

  • Eric VAN WINCOOP

    (University of Virginia and NBER)

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 nancial panic. We show that a policy that discourages balance sheet risk reduces the magnitude of nancial 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," Swiss Finance Institute Research Paper Series 11-04, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1104
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    Keywords

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    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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