Market depth, leverage, and speculative bubbles
We develop a model of rational bubbles based on leverage and the assumption of an imprecisely known maximum market size. In a bubble, traders push the asset price above its fundamental value in a dynamic way, driven by rational expectations about future price developments. At a previously unknown da...
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| Main Authors: | , |
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| Format: | Book/Monograph Working Paper |
| Language: | English |
| Published: |
Munich
CESifo, Center for Economic Studies & Ifo Institute
December 2017
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| Series: | CESifo working paper Category 6, Fiscal policy, macroeconomics and growth
no. 6806 |
| In: |
CESifo working papers (no. 6806)
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| Subjects: | |
| Online Access: | Resolving-System, kostenfrei, Volltext: http://hdl.handle.net/10419/174929 Verlag, kostenfrei, Volltext: http://www.cesifo-group.de/ifoHome/publications/docbase/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2017/wp-cesifo-2017-12/12012017006806.html Verlag, kostenfrei, Volltext: http://www.cesifo-group.de/DocDL/cesifo1_wp6806.pdf 
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| Author Notes: | Zeno Enders, Hendrik Hakenes |
| Summary: | We develop a model of rational bubbles based on leverage and the assumption of an imprecisely known maximum market size. In a bubble, traders push the asset price above its fundamental value in a dynamic way, driven by rational expectations about future price developments. At a previously unknown date, the bubble will endogenously burst. Households' decision to lend to traders with limited liability in a bubble is endogenous. Bubbles reduce welfare of future investors. We provide general conditions for the possibility of bubbles depending on uncertainty about market size, traders' degree of leverage and the risk-free rate. This allows us to discuss several policy measures. Capital requirements and a correctly implemented Tobin tax can prevent bubbles. Implemented incorrectly, however, these measures may create the possibility of bubbles and can reduce welfare. |
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| Physical Description: | Online Resource |