What happens when you regulate risk?: evidence from a simple equilibrium model
The implications of Value-at-Risk regulations are analyzed in a CARA-normal general equilibrium model. Financial institutions are heterogeneous in risk preferences, wealth and the degree of supervision. Regulatory risk constraints lower the probability of one form of a systemic crisis, at the expense of more volatile asset prices, less liquidity, and the amplification of downward price movements. This can be viewed as a consequence of the endogenously changing risk appetite of financial institutions induced by the regulatory constraints. Finally, the Value-at-Risk constraints may prevent market clearing altogether. The role of unregulated institutions (hedge-funds) is considered. The findings are illustrated with an application to the 1987 and 1998 crises.
|Date of creation:||Oct 2001|
|Contact details of provider:|| Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.|
Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/
More information through EDIRC