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American Economic Review Vol. 101 No. 3 2011

Regulating Asset Price Risk

Philippe Bacchetta1; Cédric Tille2; Eric Van Wincoop3

1 Faculty of Business and Economics, University of Lausanne, Extranef, 1015 Lausanne, Switzerland. · 2 Department of Economics, Graduate Institute, PO Box 136, 1211 Geneva 21, Switzerland. · 3 Department of Economics, University of Virginia, PO Box 400182, Charlottesville, VA 22904-4182.

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.

DOI
10.1257/aer.101.3.410
Volume
101
Issue
3
Pages
410-412
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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