Comment Prediction tools: Financial market regulation, politics and psychology

Risk managers operate in the space of risk and returns, constrained by financial market regulations. How can risk managers assess risk associated with changing regulatory structures, given that theories about the relationship between risk and return are much more developed than theories about the determinants of regulatory constraints? To help risk managers develop insight and predictive ability about the evolution of financial market regulations, the authors present a systematic framework to analyse how financial market regulation in the USA has developed in response to the global financial crisis. The framework combines elements from game theory, political science, the economics of regulation and behavioral finance. Notably, the model’s prediction for the legislation that came to be named the Dodd–Frank Act turned out to be highly accurate.