Joint Online Seminar: Externalities as Arbitrage
- ZOOM Webinar
- Prof. Benjamin HÉBERT, 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