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A leverage-based model of speculative bubbles

Listed author(s):
  • Gadi Barlevy

This paper examines whether theoretical models of bubbles based on the notion that the price of an asset can deviate from its fundamental value are useful for understanding phenomena that are often described as bubbles, and which are distinguished by other features such as large and rapid booms and busts in asset prices together with high turnover in asset ownership. In particular, I focus on riskshifting models similar to those developed in Allen and Gorton (1993) and Allen and Gale (2000). I show that such models could explain these phenomena, and discuss under what conditions booms and speculative trading would emerge. In addition, I show that these models imply that speculative bubbles can be associated with low rather than high premia on loans, in accordance with observations on credit conditions during episodes in which asset prices boomed and crashed.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-2011-07.

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Date of creation: 2011
Handle: RePEc:fip:fedhwp:wp-2011-07
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  16. Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2011. "A Theory of Asset Prices Based on Heterogeneous Information," Cowles Foundation Discussion Papers 1827, Cowles Foundation for Research in Economics, Yale University.
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  23. Frederic S. Mishkin, 2011. "Monetary Policy Strategy: Lessons from the Crisis," NBER Working Papers 16755, National Bureau of Economic Research, Inc.
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