American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Self-Fulfilling Risk Panics
American Economic Review
vol. 102,
no. 7, December 2012
(pp. 3674–3700)
Abstract
Recent crises have seen large spikes in asset price risk. We propose an explanation for such panics based on self-fulfilling shifts in beliefs about risk. A negative link between the current level and the future risk of an asset price leads to a circular relationship between the stochastic process of asset price risk and the price itself. Self-fulfilling shifts in perceived risk can be coordinated around a pure sunspot or around a macro fundamental. In a risk panic, a macro fundamental can be a focal point that affects both the magnitude of the panic and subsequent shifts in perceived risk.Citation
Bacchetta, Philippe, Cédric Tille, and Eric van Wincoop. 2012. "Self-Fulfilling Risk Panics." American Economic Review, 102 (7): 3674–3700. DOI: 10.1257/aer.102.7.3674JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises
- G12 Asset Pricing; Trading volume; Bond Interest Rates