Equilibrium Impact of Value-at-Risk Regulation
Preprint
- 1 January 2002
- preprint
- Published by Elsevier in SSRN Electronic Journal
Abstract
We study the partial and general equilibrium implications of value-at-risk (VaR) regulation in 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.Keywords
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