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A Leverage Based Model of Speculative Bubbles

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  • Gadi Barlevy

Abstract

This paper develops an equilibrium model of speculative bubbles that can be used to explore the role of various policies in either giving rise to or eliminating the possibility of asset bubbles, e.g. restricting the use of certain types of loan contracts, imposing down-payment restrictions, and changing inter-bank rates. As in previous work by Allen and Gorton (1993) and Allen and Gale (2000), a bubble arises in the model because traders are assumed to purchase assets with borrowed funds. My model adds to this literature by allowing creditors and traders to enter into a more general class of contracts, as well as by allowing speculators to trade strategically.

Suggested Citation

  • Gadi Barlevy, 2008. "A Leverage Based Model of Speculative Bubbles," 2008 Meeting Papers 196, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:196
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    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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