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Bubbles and Collateral

Author

Listed:
  • Makoto WATANABE
  • Yu Awaya
  • Jihwan Do

Abstract

We construct a model of bubbles where an asset can be used as collateral primarily due to higher-order uncertainty: while both a lender and a borrower know that the intrinsic value of the asset is low, they may still believe that a greater fool exists who will purchase it at a much higher price. We show that such bubbles can lead to inefficient overinvestment under certain conditions. Using this framework, we also examine the impacts of macroprudential policies, as well as other regulatory measures such as interest rate hikes and the resolution of uncertainty.

Suggested Citation

  • Makoto WATANABE & Yu Awaya & Jihwan Do, 2025. "Bubbles and Collateral," CIGS Working Paper Series 25-013E, The Canon Institute for Global Studies.
    • Handle: RePEc:cnn:wpaper:25-013e
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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