Financing Harmful Bubbles
AbstractWe model the stock market as a timing game, in which arbitrageurs who are not expected to be certainly rational compete over profit by bursting the bubble caused by investors' euphoria. The manager raises money by issuing shares and the arbitrageurs use leverage. If leverage is weakly regulated, it is the unique Nash equilibrium that the bubble persists for a long time. This holds even if the euphoria is negligible and all arbitrageurs are expected to be almost certainly rational. This bubble causes serious harm to the society, because the manager uses the money raised for his personal benefit.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 711.
Date of creation: Aug 2010
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More information through EDIRC
Euphoria; Leverage; Rational and Behavioral Arbitrageurs; Harmful Bubble; Unique Nash Equilibrium;
Other versions of this item:
- Hitoshi Matsushima, 2010. "Financing Harmful Bubbles," CIRJE F-Series CIRJE-F-756, CIRJE, Faculty of Economics, University of Tokyo.
- Hitoshi Matsushima, 2010. "Financing Harmful Bubbles," CARF F-Series CARF-F-227, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-21 (All new papers)
- NEP-CFN-2010-08-21 (Corporate Finance)
- NEP-GTH-2010-08-21 (Game Theory)
- NEP-MIC-2010-08-21 (Microeconomics)
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