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Asset Price Bubbles and Stock Market Interlinkages

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  • Franklin Allen
  • Douglas Gale

Abstract

The eect of stock market interlinkages on asset price bubbles are considered. Bubbles can occur when there is an agency problem between banks and the people they lend money to because the banks cannot observe how the funds are invested. This causes a risk shifting problem and asset prices are bid up above their fundamental. The greater is uncertainty about asset returns or about the amount of aggregate credit the greater is the bubble. Stock market interlinkages can moderate or exacerbate asset price bubbles.

Suggested Citation

  • Franklin Allen & Douglas Gale, 2002. "Asset Price Bubbles and Stock Market Interlinkages," Center for Financial Institutions Working Papers 02-22, Wharton School Center for Financial Institutions, University of Pennsylvania.
  • Handle: RePEc:wop:pennin:02-22
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    File URL: http://fic.wharton.upenn.edu/fic/papers/02/0222.pdf
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    References listed on IDEAS

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    1. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    2. Allen F. & Morris S. & Postlewaite A., 1993. "Finite Bubbles with Short Sale Constraints and Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 61(2), pages 206-229, December.
    3. Franklin Allen & Stephen Morris & Andrew Postlewaite, "undated". "Finite Bubbles with Short Sale Constraints and Asymmetric Information (Reprint 042)," Rodney L. White Center for Financial Research Working Papers 16-92, Wharton School Rodney L. White Center for Financial Research.
    4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    5. Jeffrey A. Frankel., 1992. "The Evolving Japanese Financial System, and the Cost of Capital," Center for International and Development Economics Research (CIDER) Working Papers C92-002, University of California at Berkeley.
    6. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-255, January.
    7. Burkhard Drees & Ceyla Pazarbasioglu, 1995. "The Nordic Banking Crises; Pitfalls in Financial Liberalization?," IMF Working Papers 95/61, International Monetary Fund.
    8. Franklin Allen & Gary Gorton, 1993. "Churning Bubbles," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 813-836.
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    Cited by:

    1. Billmeier, Andreas & Massa, Isabella, 2008. "Go long or short in pyramids? News from the Egyptian stock market," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 949-970, December.

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