Role of Leverage in Bubbles and Crashes
AbstractThis paper investigates the possibility that an unproductive company with limited debt capacity raises huge funds through share issuances by utilizing a small sign of enthusiasm. We generalize the timing game of Matsushima (2012) by permitting arbitrageurs to use high leverage for purchasing the shares. Thanks to this leverage, any arbitrageur has strong incentive to ride the bubble by continuing to purchase them, instead of timing the market quickly. We show that the harmful bubble persists for a long time as the unique Nash equilibrium. Importantly, this result holds even if the underlying positive feedback traders are not very enthusiastic.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-859.
Length: 29 pages
Date of creation: Sep 2012
Date of revision:
Contact details of provider:
Postal: Hongo 7-3-1, Bunkyo-ku, Tokyo 113-0033
Web page: http://www.cirje.e.u-tokyo.ac.jp/index.html
More information through EDIRC
Other versions of this item:
- NEP-ALL-2012-09-22 (All new papers)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CIRJE administrative office).
If references are entirely missing, you can add them using this form.