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

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References

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  1. Burton G. Malkiel, 2010. "Bubbles in Asset Prices," Working Papers 1204, Princeton University, Department of Economics, Center for Economic Policy Studies..
  2. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
  3. Markus K. Brunnermeier & Stefan Nagel, 2004. "Hedge Funds and the Technology Bubble," Journal of Finance, American Finance Association, vol. 59(5), pages 2013-2040, October.
  4. 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.
  5. Markus K Brunnermeier, 2002. "Bubbles and Crashes," FMG Discussion Papers dp401, Financial Markets Group.
  6. Abreu, Dilip & Brunnermeier, Markus K., 2002. "Synchronization risk and delayed arbitrage," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 341-360.
  7. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, October.
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Cited by:
  1. Hitoshi Matsushima, 2009. "Behavioral Aspects of Arbitrageurs in Timing Games of Bubbles and Crashes," CIRJE F-Series CIRJE-F-606, CIRJE, Faculty of Economics, 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," CIRJE F-Series CIRJE-F-859, CIRJE, Faculty of Economics, University of Tokyo.

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