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A Behavioral Model of the Credit Boom

Author

Listed:
  • David Peón
  • Anxo Calvo

    (Universidade da Coruña)

  • Manel Antelo

    (Universidade de Santiago de Compostela, IDEGA)

Abstract

We offer a simple model of herding and limits of arbitrage in retail credit markets that follows the behavioral approach of Shleifer (2000). We show why solely behavioral biases by participants in the industry could explain how a credit bubble might be fed by the banking sector. According to our model, optimistic banks would lead the industry while it would be rational for unbiased banks to herd under conditions we derive. An important finding is the role of limits of arbitrage in the industry: there would be no incentives for rational banks to correct the misallocations of their biased competitors.

Suggested Citation

  • David Peón & Anxo Calvo & Manel Antelo, 2014. "A Behavioral Model of the Credit Boom," Documentos de trabajo - Analise Economica 0057, IDEGA - Instituto Universitario de Estudios e Desenvolvemento de Galicia.
    • Handle: RePEc:edg:anecon:0057
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    Cited by:

    1. Federico Favaretto & Donato Masciandaro, 2014. "Behavioral Economics and Monetary Policy," BAFFI CAREFIN Working Papers 1501, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

    More about this item

    Keywords

    Credit bubbles; EMH; information economics; banking efficiency; behavioral finance; limits of arbitrage;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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