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Impact of Financial Regulation and Innovation on Bubbles and Crashes due to Limited Arbitrage: Awareness Heterogeneity

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  • Hitoshi Matsushima

    (Faculty of Economics, University of Tokyo)

Abstract

We examine the impact of financial regulation and innovation on bubbles and crashes due to limited arbitrage by modeling timing games among strategic arbitrageurs whose rationality is not commonly known. An unproductive company raises funds by issuing shares, and for purchasing shares, arbitrageurs borrow money from positive feedback traders. The key concept is awareness heterogeneity: positive feedback traders are unaware of euphoria, but arbitrageurs are aware of it. We show the impact of high leverage ratio depends on whether naked CDS is available, and the impact of naked CDS depends on growth balance between positive feedback traders' capital and loan.

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Bibliographic Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-876.

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Length: 45 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:tky:fseres:2013cf876

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  1. Mohamed Karim KEFI & Hadhek Zouhaier, 2012. "Inequality and Economic Growth," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(8), pages 1013-1025, December.
  2. 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.
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  7. Hitoshi Matsushima, 2010. "Financing Harmful Bubbles," KIER Working Papers 711, Kyoto University, Institute of Economic Research.
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  9. Hitoshi Matsushima, 1998. "Multimarket Contact, Imperfect Monitoring, and Implicit Collusion," CIRJE F-Series CIRJE-F-24, CIRJE, Faculty of Economics, University of Tokyo.
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Cited by:
  1. Hitoshi Matsushima, 2013. "Role of Credit Default Swap in Bubbles and Crashes," CIRJE F-Series CIRJE-F-905, CIRJE, Faculty of Economics, University of Tokyo.

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