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American Economic Review Vol. 102 No. 7 2012

Self-Fulfilling Risk Panics

Philippe Bacchetta1; Cédric Tille2; Eric Van Wincoop3

1 University of Lausanne, 1015 Dorigny, Switzerland, and CEPR. · 2 Graduate Institute of International and Development Studies, PO Box 136, 1211 Geneva 21, Switzerland, and CEPR. · 3 University of Virginia, Department of Economics, PO Box 400182, Charlottesville, VA 22904, and NBER.

Abstract

Recent crises have seen large spikes in asset price risk. We propose an explanation for such panics based on self-fulfilling shifts in beliefs about risk. A negative link between the current level and the future risk of an asset price leads to a circular relationship between the stochastic process of asset price risk and the price itself. Self-fulfilling shifts in perceived risk can be coordinated around a pure sunspot or around a macro fundamental. In a risk panic, a macro fundamental can be a focal point that affects both the magnitude of the panic and subsequent shifts in perceived risk.

DOI
10.1257/aer.102.7.3674
Volume
102
Issue
7
Pages
3674-3700
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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