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Does Risk Management Make Financial Markets Riskier?

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Risk Management

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Abstract

Value-at-risk figures are calculated on the basis of historical market volatility and capital requirements are determined on the basis of these calculations. A rise in historical market volatility leads to an increase of the regulatory capital requirement. If market participants engage in forced selling to decrease risk exposure to meet imposed capital requirements, volatility may be amplified. Risk management on the individual firm level may thus actually lead to an increase of market volatility in the economy as a whole and the regulatory aim to limit the chances of systemic effects is undermined. We present an informal exposition of this argument as well as supporting empirical and anecdotal evidence.

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Author information

Authors and Affiliations

  1. Melbourne Business School, 200 Leicester Street, Carlton, Victoria, 3053, Australia

    Ian R. Harper

  2. Economic Theory, University of Saarland, D-66041, Saarbruecken, Germany

    Joachim G. Keller

  3. Department of Economics, University of Leipzig, Marschnerstraße 31, 04109, Leipzig, Germany

    Christian M. Pfeil (associated research assistant)

Authors
  1. Ian R. Harper
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  2. Joachim G. Keller
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  3. Christian M. Pfeil
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Editor information

Editors and Affiliations

  1. Otto Beisheim Graduate School of Management, WHU, Burgplatz 2, 56179, Vallendar

    Michael Frenkel  & Markus Rudolf  & 

  2. Stiftungslehrstuhl Unternehmensfinanzierung und Kapitalmärkte, EUROPEAN BUSINESS SCHOOL International University, Schloss Reichartshausen, 65375, Oestrich-Winkel

    Ulrich Hommel

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Harper, I.R., Keller, J.G., Pfeil, C.M. (2005). Does Risk Management Make Financial Markets Riskier?. In: Frenkel, M., Rudolf, M., Hommel, U. (eds) Risk Management. Springer, Berlin, Heidelberg. https://doi.org/10.1007/3-540-26993-2_39

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