Finance Brown Bag Seminar
Speaker: Grigory Vilkov, Goethe University Frankfurt
Title: Comparing Different Regulatory Measures to Control Stock Market Volatility: A General Equilibrium Analysis (joint work with Adrian Buss, Bernard Dumas (both INSEAD) and Raman Uppal (EDHEC))
In this paper, we compare the effects of different regulatory measures used to reduce the volatility of stock-market returns. The regulatory measures we study are the Tobin tax, shortsale constraints, and leverage constraints. The main contribution of our research is to evaluate these regulatory measures within the same dynamic, stochastic general equilibrium model of a production economy, so that one can compare both the direct and indirect effects of the different measures on the financial and real sectors within the same economic setting. Examining an economy with stock returns that are excessively volatile because investors disagree on how to interpret news, we find that of the three measures we consider, only the leverage constraint is effective in reducing stock-market volatility, and this is accompanied by positive effects on the real sector: an increase in the levels of consumption growth and investment growth, and a decrease in their volatilities. In contrast, both the Tobin tax and shortsale constraints increase volatility in financial markets, and have negative effects on the real sector: a decrease in the growth rates of output and investment and an increase in the volatility of consumption-growth.