2013/01/25 by Sebastian Poledna, Stefan Thurner, Poledna, Sebastian +5 · 2 citations
Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Economic theories and models #FOS: Economics and business #FOS: Physical sciences #Financial Markets and Investment Strategies #Global Financial Crisis and Policies #Physics and Society (physics.soc-ph) #Risk Management (q-fin.RM)
paper · pdf · doi:10.48550/arxiv.1301.6114
openalex publication_date 2013/01/25 · openalex created_date 2022/10/03 · openalex updated_date 2026/07/28
We use a simple agent based model of value investors in financial markets to\ntest three credit regulation policies. The first is the unregulated case, which\nonly imposes limits on maximum leverage. The second is Basle II and the third\nis a hypothetical alternative in which banks perfectly hedge all of their\nleverage-induced risk with options. When compared to the unregulated case both\nBasle II and the perfect hedge policy reduce the risk of default when leverage\nis low but increase it when leverage is high. This is because both regulation\npolicies increase the amount of synchronized buying and selling needed to\nachieve deleveraging, which can destabilize the market. None of these policies\nare optimal for everyone: Risk neutral investors prefer the unregulated case\nwith low maximum leverage, banks prefer the perfect hedge policy, and fund\nmanagers prefer the unregulated case with high maximum leverage. No one prefers\nBasle II.\n