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Can Miracles Lead to Crises? The Role of Optimism in Emerging Markets Crises

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  • EMINE BOZ

Abstract

Emerging market financial crises are abrupt and dramatic usually occurring after a precrisis bonanza. This paper develops an equilibrium asset pricing model with informational frictions in which crisis itself is a--"consequence"--of the investor optimism in the period preceding the crisis. If preceded by a sequence of positive signals, a small, negative noise shock can trigger a downward adjustment in investors' beliefs, asset prices, and consumption. The magnitude of this downward adjustment--"increases"--with the level of optimism attained prior to the negative signal. Moreover, with informational frictions, asset prices display persistent effects in response to transitory shocks. Copyright (c) 2009 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): 6 (09)
Pages: 1189-1215

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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:6:p:1189-1215

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  1. Van Nieuwerburgh, Stijn & Veldkamp, Laura, 2006. "Learning asymmetries in real business cycles," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 753-772, May.
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  7. Pierre-Olivier Gourinchas & Aaron Tornell, 2000. "Exchange Rate Dynamics, Learning and Misperception," Econometric Society World Congress 2000 Contributed Papers 0795, Econometric Society.
  8. Judd, Kenneth L., 1992. "Projection methods for solving aggregate growth models," Journal of Economic Theory, Elsevier, vol. 58(2), pages 410-452, December.
  9. Enrique G. Mendoza & Katherine A. Smith, 2004. "Quantitative Implication of A Debt-Deflation Theory of Sudden Stops and Asset Prices," NBER Working Papers 10940, National Bureau of Economic Research, Inc.
  10. Domowitz, Ian & Glen, Jack & Madhavan, Ananth, 2001. "Liquidity, Volatility and Equity Trading Costs across Countries and over Time," International Finance, Wiley Blackwell, vol. 4(2), pages 221-55, Summer.
  11. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
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Cited by:
  1. Enrique G. Mendoza & Emine Boz, 2009. "Financial Innovation, the Discovery of Risk, and the U.S. Credit Crisis," 2009 Meeting Papers 1273, Society for Economic Dynamics.
  2. Zhu, Junjun & Xie, Shiyu, 2011. "Asymmetric Shocks, Long-term Bonds and Sovereign Default," MPRA Paper 28236, University Library of Munich, Germany.
  3. Agustin Roitman & Christian Daude, 2011. "Imperfect Information and Saving in a Small Open Economy," IMF Working Papers 11/60, International Monetary Fund.
  4. Emine Boz & Christian Daude & Ceyhun Bora Durdu, 2008. "Emerging market business cycles revisited: learning about the trend," International Finance Discussion Papers 927, Board of Governors of the Federal Reserve System (U.S.).
  5. Boz, Emine & Daude, Christian & Bora Durdu, C., 2011. "Emerging market business cycles: Learning about the trend," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 616-631.

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