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REGULATION SIMULATION

Philip Maymin

Gerstein Fisher Research Center for Finance and Risk Engineering Polytechnic Institute of New York University, USA

 

ABSTRACT

A deterministic trading strategy by a representative investor on a single market asset, which generates complex and realistic returns with its first four moments similar to the empirical values of European stock indices, is used to simulate the effects of financial regulation that either pricks bubbles, props up crashes, or both. The results suggest that regulation makes the market process appear more Gaussian and less complex, with the difference more pronounced for more frequent intervention, though particular periods can be worse than the non-regulated version, and that pricking bubbles and propping up crashes are not symmetrical.

Key words: determinism, complexity, regulation, bubbles, crashes

JEL Classification code: G18, G01, G19