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Financing Harmful Bubbles

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  • Hitoshi Matsushima

    () (Faculty of Economics, University of Tokyo)

Abstract

We 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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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP711.pdf
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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 711.

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Length: 24pages
Date of creation: Aug 2010
Date of revision:
Handle: RePEc:kyo:wpaper:711

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Related research

Keywords: Euphoria; Leverage; Rational and Behavioral Arbitrageurs; Harmful Bubble; Unique Nash Equilibrium;

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Cited by:
  1. Hitoshi Matsushima, 2012. "Behavioral Aspects of Arbitrageurs in Timing Games of Bubbles and Crashes," CARF F-Series CARF-F-285, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  2. Hitoshi Matsushima, 2013. "Impact of Financial Regulation and Innovation on Bubbles and Crashes due to Limited Arbitrage: Awareness Heterogeneity," CIRJE F-Series CIRJE-F-876, CIRJE, Faculty of Economics, University of Tokyo.
  3. Hitoshi Matsushima, 2012. "Role of Leverage in Bubbles and Crashes," CARF F-Series CARF-F-288, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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