Advanced Search
MyIDEAS: Login to save this paper or follow this series

Tropical bubbles : asset prices in Latin America, 1980-2001

Contents:

Author Info

  • Herrera, Santiago
  • Perry, Guillermo
Registered author(s):

    Abstract

    The authors test for the existence of asset price bubbles in Latin America in 1980-2001, focusing mainly on stock prices. Based on unit root and cointegration tests, they find that they cannot reject the hypothesis of bubbles. They arrive at the same conclusion using Froot and Obstfeld's intrinsic bubbles model. To examine empirical regularities of these bubble episodes in the region, the authors identify periods of significant stock price overvaluation. They quantify the relative importance of different factors that determine the probability of bubble occurrence, focusing on the contrast between the country-specific variables and the common external factors. They include as country-specific variables both the level and the volatility of domestic credit growth, the volatility of asset returns, the capital flows to each country, and the terms of trade. As common external variables, they consider the degree of asset overvaluation in the U.S. stock and real estate markets and the term spread of U.S. Treasury securities. To quantitatively assess the relative importance of each factor, they estimate a logit model for a panel of five Latin American countries from 1985 to 2001. In general, the authors find that the marginal probabilities of common and country-specific variables are of roughly the same order of magnitude. This finding contrasts with those of previous studies that real asset returns in Latin America are dominated by local factors. Finally, the authors explore the main channels through which asset prices affect real economic activity, with the most important being the balance sheet effect and its impact on bank lending. They show how the allocation of bank lending across different sectors responded sensitively to real estate prices during the boom years in countries that experienced banking crises. Thus asset price bubbles have long-lasting effects in the financial sector and, through this channel, on growth. Another channel through which asset prices-particularly stock market prices-affect long-run growth is through their effect on investment. The authors find a strong positive association between stock prices and investment and a negative effect of stock price volatility on investment. An additional motive for the central bank to monitor asset prices is the general coincidence of the crash episodes identified by the authors with currency crises in the region in the past two decades.

    Download Info

    If 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.
    File URL: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2002/01/07/000094946_0112110518506/Rendered/PDF/multi0page.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2724.

    as in new window
    Length:
    Date of creation: 30 Nov 2001
    Date of revision:
    Handle: RePEc:wbk:wbrwps:2724

    Contact details of provider:
    Postal: 1818 H Street, N.W., Washington, DC 20433
    Phone: (202) 477-1234
    Email:
    Web page: http://www.worldbank.org/
    More information through EDIRC

    Related research

    Keywords: Payment Systems&Infrastructure; Environmental Economics&Policies; Financial Intermediation; Markets and Market Access; Economic Theory&Research; Economic Theory&Research; Financial Intermediation; Access to Markets; Markets and Market Access; Environmental Economics&Policies;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
    2. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
    3. Taylor, Mark P. & Peel, David A., 1998. "Periodically collapsing stock price bubbles: a robust test," Economics Letters, Elsevier, vol. 61(2), pages 221-228, November.
    4. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Intrinsic Bubbles: The Case of Stock Prices," American Economic Review, American Economic Association, vol. 81(5), pages 1189-214, December.
    5. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    6. Roger G. Ibbotson & Laurence B. Siegel, 1984. "Real Estate Returns: A Comparison with Other Investments," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(3), pages 219-242.
    7. Canova, Fabio & De Nicolo', Gianni, 1995. "Stock returns and real activity: A structural approach," European Economic Review, Elsevier, vol. 39(5), pages 981-1015, May.
    8. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
    9. Michael P. Dooley, 1995. "A Survey of Academic Literature on Controls over International Capital Transactions," NBER Working Papers 5352, National Bureau of Economic Research, Inc.
    10. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
    11. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-30, September.
    12. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    13. Campbell, John, 2000. "Asset Pricing at the Millennium," Scholarly Articles 3294737, Harvard University Department of Economics.
    14. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June.
    15. Vogelsang, T.J. & Perron, P., 1994. "Additional Tests for a Unit Root Allowing for a Break in the Trend Function at an Unknown Time," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9422, Universite de Montreal, Departement de sciences economiques.
    16. Robert J. Shiller, 2001. "Bubbles, Human Judgment, and Expert Opinion," Cowles Foundation Discussion Papers 1303, Cowles Foundation for Research in Economics, Yale University.
    17. Hargis, Kent & Maloney, William F, 1997. "Emerging Equity Markets: Are They For Real?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 243-62, Summer.
    18. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June.
    19. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
    20. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
    21. Conley, John P. & Maloney, William F., 1995. "Optimal sequencing of credible reforms with uncertain outcomes," Journal of Development Economics, Elsevier, vol. 48(1), pages 151-166, October.
    22. Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1999. "Detecting Periodically Collapsing Bubbles: A Markov-Switching Unit Root Test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 14(2), pages 143-54, March-Apr.
    23. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-30, June.
    24. Richard J. Herring & Susan Wachter, 1999. "Real Estate Booms and Banking Busts: An International Perspective," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 99-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
    25. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
    26. Herrara, Santiago & Garcia, Conrado, 1999. "User's guide to an early warning system for macroeconomic vulnerability in Latin American countries," Policy Research Working Paper Series 2233, The World Bank.
    27. Bengt Holmstrom & Jean Tirole, 1998. "LAPM: A Liquidity Based Asset Pricing Model," Working papers 98-8, Massachusetts Institute of Technology (MIT), Department of Economics.
    28. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
    29. Sarno, Lucio & Taylor, Mark P., 1999. "Moral hazard, asset price bubbles, capital flows, and the East Asian crisis:: the first tests," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 637-657, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Mermelstein, David A., 2006. "Defaults en carteras hipotecarias, macroeconomía y arreglos institucionales: Más allá de los modelos de Credit-Scoring tradicionales
      [Mortgage defaults, macroeconomics, and institutional arrangemen
      ," MPRA Paper 7535, University Library of Munich, Germany.
    2. Aquiles Arrieta Barcasnegras, 2012. "La relación entre los flujos de capital y el precio de la vivienda: el caso colombiano," REVISTA DE ECONOMÍA DEL CARIBE, UNIVERSIDAD DEL NORTE.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:2724. See general 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: (Roula I. Yazigi).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.