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American Economic Review: Vol. 101 No. 3 (May 2011)

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Regulating Asset Price Risk

Article Citation

Bacchetta, Philippe, Cédric Tille, and Eric van Wincoop. 2011. "Regulating Asset Price Risk." American Economic Review, 101(3): 410-12.

DOI: 10.1257/aer.101.3.410

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.

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Authors

Bacchetta, Philippe (U Lausanne)
Tille, Cédric (Graduate Institute, Geneva)
van Wincoop, Eric (U VA)

JEL Classifications

G01: Financial Crises
G12: Asset Pricing; Trading volume; Bond Interest Rates
G18: General Financial Markets: Government Policy and Regulation
G28: Financial Institutions and Services: Government Policy and Regulation


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