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Quiet Bubbles

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  • Harrison Hong
  • David Sraer

Abstract

Commentaries on the credit bubble of 2003-2007 routinely equate it with earlier episodes like the Internet boom. While credits were over-priced like Internet stocks a decade before, we show, using a model based on disagreement and short-sales constraints, that this is where the similarity ends. 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.

Suggested Citation

  • Harrison Hong & David Sraer, 2012. "Quiet Bubbles," NBER Working Papers 18547, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:18547
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    References listed on IDEAS

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    1. Hong, Harrison & Sraer, David, 2013. "Quiet bubbles," Journal of Financial Economics, Elsevier, vol. 110(3), pages 596-606.
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    10. 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.
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    Cited by:

    1. Hong, Harrison & Sraer, David, 2013. "Quiet bubbles," Journal of Financial Economics, Elsevier, vol. 110(3), pages 596-606.
    2. Barlevy, Gadi, 2014. "A leverage-based model of speculative bubbles," Journal of Economic Theory, Elsevier, vol. 153(C), pages 459-505.
    3. Kim, Jun Sik & Ryu, Doojin, 2015. "Are the KOSPI 200 implied volatilities useful in value-at-risk models?," Emerging Markets Review, Elsevier, vol. 22(C), pages 43-64.
    4. 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.
    5. Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2011. "A Theory of Asset Pricing Based on Heterogeneous Information," NBER Working Papers 17548, National Bureau of Economic Research, Inc.
    6. Roseline Bilina Falafala & Robert A. Jarrow & Philip Protter, 2016. "Relative asset price bubbles," Annals of Finance, Springer, vol. 12(2), pages 135-160, May.

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    More about this item

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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