Deregulation and Risk

Abstract

The recent market turmoil has brought attention to how deregulation of the financial sector affects risk. The purpose of our study is to examine the market's perception of risk associated with deregulation. We accomplish this by decomposing security risk around deregulation into idiosyncratic and systematic risk. We examine deregulation of several industries, and find a consistent pattern of risk adjustment to deregulation. We find increased security risk is temporary and largely idiosyncratic. These results are consistent with the idea that firms in deregulated industries learn to deal with competition.

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