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Joint Online Seminar: Externalities as Arbitrage

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23Oct 2020

1100-1230

  • ZOOM Webinar
  • Prof. Benjamin H√ČBERT, Stanford University

How can we assess whether macro-prudential regulations are having their intended effects? If these regulations are optimal, their marginal benefit of addressing externalities is equal to their marginal cost of distorting risk-sharing. Under plausible assumptions about implementation, these risk-sharing distortions will manifest as arbitrage opportunities that constrained intermediaries are unable to exploit. Measuring arbitrage opportunities allows us to construct an “externality-mimicking portfolio” whose returns track the externalities that would rationalize existing regulations as optimal.

 

We can then conduct a sort of revealed-preference exercise and ask whether the recovered externalities are sensible. Conducting this exercise, I find that the signs of existing CIP violations are inconsistent with optimal macro-prudential policy.

 

For details, please refer to here.

 

Zoom Webinar: https://hkbu.zoom.us/j/293341034