Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099773 | Journal of Economic Dynamics and Control | 2006 | 37 Pages |
Abstract
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.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Markus Leippold, Fabio Trojani, Paolo Vanini,