Equilibrium impact of value-at-risk regulation

We study the asset-pricing implications of value-at-risk (VaR) regulation in incomplete continuous-time economies with intermediate expenditure, stochastic opportunity set, and heterogeneous attitudes to risk. Our findings show that because of an anticipatory effect of VaR constraints on the optimal...

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Bibliographic Details
Published inJournal of economic dynamics & control Vol. 30; no. 8; pp. 1277 - 1313
Main Authors Leippold, Markus, Trojani, Fabio, Vanini, Paolo
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.08.2006
Elsevier
Elsevier Sequoia S.A
SeriesJournal of Economic Dynamics and Control
Subjects
Dynamic financial equilibria
Equilibrium
Market value
Perturbation theory
Regulatory policy
Risk exposure
Stochastic control theory
Stochastic opportunity set
Stochastic processes
Studies
Value-at-risk
Perturbation theory
Stochastic opportunity set
G11
Dynamic financial equilibria
G12
G28
D92
C60
Regulatory policy
C61
Value-at-risk
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Summary:We study the asset-pricing implications of value-at-risk (VaR) regulation in incomplete continuous-time economies with intermediate expenditure, stochastic opportunity set, and heterogeneous attitudes to risk. Our findings show that because of an anticipatory effect of VaR constraints on the optimal hedging demand, the partial equilibrium incentives of VaR regulation can lead banks to increase their risk exposure in high-volatility states. In general equilibrium, VaR constraints can produce unambiguously lower interest rates and higher equity Sharpe ratios. The VaR impact on equity volatility and equity expected returns is ambiguous.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2005.04.008