In one class of models, misperception of risk generates excessive demand for risky assets, housing and financial assets in particular.
Second, undo the effects of uncertainty on the portfolio side, and help recycle the funds towards risky assets.
It affects portfolio decisions. It has led to a dramatic shift away from risky assets to riskless assets, or at least assets perceived as riskless.
So at times of trouble they will retreat from risky assets such as hedge funds and into cash and government bonds.
Already central Banks have relaxed their rules on what they will accept from Banks as collateral, which has helped to support the prices of risky assets.
