Self-Fulfilling Risk Panics
AbstractRecent 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.
CitationBacchetta, Philippe, Cédric Tille, and Eric van Wincoop. 2012. "Self-Fulfilling Risk Panics." American Economic Review, 102 (7): 3674-3700. DOI: 10.1257/aer.102.7.3674
- D81 Criteria for Decision-Making under Risk and Uncertainty
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises
- G12 Asset Pricing; Trading volume; Bond Interest Rates