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A Leverage Based Model of Speculative Bubbles

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  • Gadi Barlevy

Abstract

This paper develops an equilibrium model of speculative bubbles that can be used to explore the role of various policies in either giving rise to or eliminating the possibility of asset bubbles, e.g. restricting the use of certain types of loan contracts, imposing down-payment restrictions, and changing inter-bank rates. As in previous work by Allen and Gorton (1993) and Allen and Gale (2000), a bubble arises in the model because traders are assumed to purchase assets with borrowed funds. My model adds to this literature by allowing creditors and traders to enter into a more general class of contracts, as well as by allowing speculators to trade strategically.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 196.

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Date of creation: 2008
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Handle: RePEc:red:sed008:196

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  1. Temin, Peter & Voth, Hans-Joachim, 2004. "Riding the South Sea Bubble," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4221, C.E.P.R. Discussion Papers.
  2. Harrison Hong & David Sraer, 2012. "Quiet Bubbles," NBER Working Papers 18547, National Bureau of Economic Research, Inc.
  3. Gadi Barlevy & Jonas D. M. Fisher, 2010. "Mortgage choices and housing speculation," Working Paper Series, Federal Reserve Bank of Chicago WP-2010-12, Federal Reserve Bank of Chicago.
  4. Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, . "Assessing Dynamic Efficiency: Theory and Evidence," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 14-88, Wharton School Rodney L. White Center for Financial Research.
  5. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, American Economic Association, vol. 84(4), pages 933-55, September.
  6. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1163-81, September.
  7. Markus K Brunnermeier, 2002. "Bubbles and Crashes," FMG Discussion Papers, Financial Markets Group dp401, Financial Markets Group.
  8. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 467.
  9. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  10. Christian Hellwig & Aleh Tsyvinski & Elias Albagli, 2012. "A theory of asset prices based on heterogeneous information," 2012 Meeting Papers, Society for Economic Dynamics 394, Society for Economic Dynamics.
  11. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(460), pages 236-55, January.
  12. Allen F. & Morris S. & Postlewaite A., 1993. "Finite Bubbles with Short Sale Constraints and Asymmetric Information," Journal of Economic Theory, Elsevier, Elsevier, vol. 61(2), pages 206-229, December.
  13. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, Econometric Society, vol. 65(1), pages 19-58, January.
  14. Simon Kwan, 2000. "Margin requirements as a policy tool?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue mar24.
  15. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 92(2), pages 323-36, May.
  16. Allen, Franklin & Gorton, Gary, 1993. "Churning Bubbles," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(4), pages 813-36, October.
  17. Manishi Prasad & Peter Wahlqvist & Rich Shikiar & Ya-Chen Tina Shih, 2004. "A," PharmacoEconomics, Springer Healthcare | Adis, Springer Healthcare | Adis, vol. 22(4), pages 225-244.
  18. Hajime Miyazaki, 1977. "The Rat Race and Internal Labor Markets," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 8(2), pages 394-418, Autumn.
  19. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
  20. Franklin Allen & Douglas Gale, 2000. "Asset Price Bubbles and Monetary Policy," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 01-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
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Cited by:
  1. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2011. "Monetary Policy and Stock Market Booms," Working Papers, Banco Central de Reserva del Perú 2011-005, Banco Central de Reserva del Perú.
  2. Blommestein, H.J. & Eijffinger, S.C.W. & Qian, Z., 2011. "Monetary Policy Rules, Adverse Selection and Long-Run Financial Risk," Discussion Paper, Tilburg University, Center for Economic Research 2011-121, Tilburg University, Center for Economic Research.
  3. Giglio, Stefano & Severo, Tiago, 2012. "Intangible capital, relative asset shortages and bubbles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 59(3), pages 303-317.
  4. Luik, Marc-André & Wesselbaum, Dennis, 2014. "Bubbles over the U.S. business cycle: A macroeconometric approach," Journal of Macroeconomics, Elsevier, Elsevier, vol. 40(C), pages 27-41.
  5. Acharya, Viral V & Naqvi, Hassan, 2012. "The Seeds of a Crisis: A Theory of Bank Liquidity and Risk-Taking over the Business Cycle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8851, C.E.P.R. Discussion Papers.
  6. Blommestein, Hans J. & Eijffinger, Sylvester C W & Qian, Zongxin, 2011. "A Dynamic General Equilibrium Analysis of Monetary Policy Rules, Adverse Selection and Long-Run Financial Risk," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8652, C.E.P.R. Discussion Papers.
  7. Randall Wright & Guillaume Rocheteau, 2011. "Liquidity and Asset Market Dynamics," 2011 Meeting Papers, Society for Economic Dynamics 103, Society for Economic Dynamics.
  8. Acharya, Viral & Naqvi, Hassan, 2012. "The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle," Journal of Financial Economics, Elsevier, Elsevier, vol. 106(2), pages 349-366.
  9. Lubos Komarek & Ivana Kubicová, 2011. "The Classification and Identification of Asset Price Bubbles," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 61(1), pages 34-48, January.
  10. Dubecq, S. & Mojon, B. & Ragot, X., 2009. "Fuzzy Capital Requirements, Risk-Shifting and the Risk Taking Channel of Monetary Policy," Working papers, Banque de France 254, Banque de France.

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