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Explanations of Asset Price Bubbles

Author

Listed:
  • Gergely Lakos

    (Magyar Nemzeti Bank)

  • Tibor Szendrei

    (Magyar Nemzeti Bank)

Abstract

The study provides an overview of the theories explaining asset price bubbles found in the literature. Six different explanations are identified that can cause asset price bubbles on their own as well as in some combination: informational frictions, short selling constraints, limited liability of financial intermediaries, herd behaviour among market participants, perverse incentives in the provision of information, and market participants’ bounded rationality. Mispricing arising from asset price bubbles can considerably hamper the efficient allocation of resources, which may warrant government intervention. Nevertheless, most of the underlying factors that induce asset price bubbles can only be limited or offset rather than fully eliminated. Financial stability is mainly threatened by debt-financed asset price bubbles. With respect to asset price bubbles, the mandate and available instruments of macroprudential policy are limited to the mitigation of cyclical fluctuations in the related lending.

Suggested Citation

  • Gergely Lakos & Tibor Szendrei, 2017. "Explanations of Asset Price Bubbles," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 16(4), pages 122-150.
    • Handle: RePEc:mnb:finrev:v:16:y:2017:i:4:p:122-150
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    File URL: http://english.hitelintezetiszemle.hu/letoltes/fer-16-4-st5-lakos-szendrei.pdf
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    References listed on IDEAS

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    Cited by:

    1. Máté Csiki & Gábor Dávid Kiss, 2018. "Capital Market Contagion in the Stock Markets of Visegrád Countries Based on the Heckman Selection Model," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 17(4), pages 23-52.

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    More about this item

    Keywords

    asset price bubble; excessive lending; bounded rationality; financial stability; macroprudential policy;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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