Externalities as Arbitrage / Benjamin M. Hébert.

Format:

Book

Author/Creator:

Hébert, Benjamin M.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27953.

NBER working paper series no. w27953

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

How can we assess whether macro-prudential regulations are having their intended effects? If these regulations are optimal, their marginal benefit of addressing externalities should equal their marginal cost of distorting risk-sharing. These risk-sharing distortions will manifest as trading opportunities that intermediaries are unable to exploit. Focusing in particular on arbitrage opportunities, I construct an "externality-mimicking portfolio" whose returns track the externalities that would rationalize existing regulations as optimal. I conduct a revealed-preference exercise using this portfolio and test whether the recovered externalities are sensible. I find that the signs of existing CIP violations are inconsistent with optimal policy.

Notes:

Print version record

October 2020.