Information Acquisition and Excessive Risk: Impact of Policy Rate and Market Volatility
Excessive risk-taking of financial agents drew a lot of attention in the aftermath of the financial crisis. Low interest rates and subdued market volatility during the Great Moderation are sometimes blamed for stimulating risk-taking and leading to the recent financial crisis. In recent years, wi...
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| Format: | Article |
| Language: | English |
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University of Finance and Administration
2015-12-01
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| Series: | ACTA VŠFS |
| Subjects: | |
| Online Access: | https://is.vsfs.cz/auth/repo/5133/AUDZEI.pdf |
| Summary: | Excessive risk-taking of financial agents drew a lot of attention in the aftermath of the
financial crisis. Low interest rates and subdued market volatility during the Great Moderation
are sometimes blamed for stimulating risk-taking and leading to the recent financial
crisis. In recent years, with many central banks around the world conducting the policy of
low interest rates and mitigating market risks, it has been debatable whether this policy
contributes to the building up of another credit boom. This paper addresses this issue by
focusing on information acquisition by the financial agents. We build a theoretical model
which captures excessive risk taking in response to changes in policy rate and market volatility.
This excessive risk takes the form of an increased risk appetite of the agents, but also
of decreased incentives to acquire information about risky assets. As a result, with market
risk being reduced, agents tend to acquire more risk in their portfolios then they would
with the higher market risk. The same forces increase portfolio risk when the safe interest
rate is falling. The robustness of the results is considered with different learning rules. |
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| ISSN: | 1802-792X 1802-7946 |