Motivated by the recent subprime mortgage crisis, we explore whether speculative bubble models of equity based on investor disagreement and short-sales constraints can also provide an explanation for the overvaluation of debt contracts. We find that this is unlikely. Equity bubbles are loud: price and volume go together as investors speculate on capital gains from reselling to more optimistic investors. But this resale option is limited for debt since its upside payoff is bounded. Debt bubbles then require an optimism bias among investors. But greater optimism leads to less speculative trading as investors view the debt as safe and having limited upside. Debt bubbles are hence quiet—high price comes with low volume. We find the predicted price–volume relationship of credits over the 2003–2007 credit boom.
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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
- Wei Xiong & Hongjun Yan & Review Financial, 2007.
"Heterogeneous Expectations and Bond Markets,"
Yale School of Management Working Papers
amz2614, Yale School of Management, revised 01 Jun 2009.
- Hong, Harrison & Stein, Jeremy, 2007.
"Disagreement and the Stock Market,"
2894690, Harvard University Department of Economics.
- Asquith, Paul & Au, Andrea S. & Covert, Thomas & Pathak, Parag A., 2013.
"The market for borrowing corporate bonds,"
Journal of Financial Economics,
Elsevier, vol. 107(1), pages 155-182.
- Jennifer Koski & Jeffrey Pontiff, 1996.
"How Are Derivatives Used? Evidence from the Mutual Fund Industry,"
Center for Financial Institutions Working Papers
96-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Jennifer Lynch Koski & Jeffrey Pontiff, 1999. "How Are Derivatives Used? Evidence from the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 54(2), pages 791-816, 04.
- Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002.
"Breadth of ownership and stock returns,"
Journal of Financial Economics,
Elsevier, vol. 66(2-3), pages 171-205.
- Joshua D. Coval & Jakub W. Jurek & Erik Stafford, 2009. "Economic Catastrophe Bonds," American Economic Review, American Economic Association, vol. 99(3), pages 628-66, June.
- Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 323-36, May.
- Harrison Hong & David Sraer, 2012.
NBER Working Papers
18547, National Bureau of Economic Research, Inc.
- Almazan, Andres & Brown, Keith C. & Carlson, Murray & Chapman, David A., 2004. "Why constrain your mutual fund manager?," Journal of Financial Economics, Elsevier, vol. 73(2), pages 289-321, August.
- Robin Greenwood & Samuel G. Hanson, 2011. "Issuer Quality and the Credit Cycle," NBER Working Papers 17197, National Bureau of Economic Research, Inc.
- Baker, Malcolm & Greenwood, Robin & Wurgler, Jeffrey, 2003. "The maturity of debt issues and predictable variation in bond returns," Journal of Financial Economics, Elsevier, vol. 70(2), pages 261-291, November.
- Harrison Hong & Jose Scheinkman & Wei Xiong, 2005.
"Asset Float and Speculative Bubbles,"
122247000000000861, UCLA Department of Economics.
- Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-68, September.
When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:110:y:2013:i:3:p:596-606. 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: (Zhang, Lei)
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.