Asset bubbles and credit constraints

We provide a theory of rational stock price bubbles in production economies with infinitely lived agents. Firms meet stochastic investment opportunities and face endogenous credit constraints. They are not fully committed to repaying debt. Credit constraints are derived from incentive constraints in optimal contracts which ensure default never occurs in equilibrium. Stock price bubbles can emerge through a positive feedback loop mechanism and cannot be ruled out by transversality conditions. These bubbles command a liquidity premium and raise investment by raising the debt limit. Their collapse leads to a recession and a stock market crash.Published versio

The main determinants of banking crises in OECD countries

Banks’ stability can be affected by economic fluctuations, banks’ risk-taking behavior, connections among banks and countries’ financial system structure. At the same time, banking regulation and supervision were designed to protect banks from failure, but a large number of banking crises were not prevented recently. Using binary response models for panel data and focusing on OECD countries, this paper studies the main determinants of banking crises over a period of 21 years. Results suggest a bank’s high debt and a country’s low GDP growth rate as the major determinants of banking crises. There is also evidence of contagion across countries from the same geographical region and from G7 to other countries, and that bank-based financial systems are less prone to borderline banking crises. Regulatory and supervision practices are found not to have been relevant in bankruptcy prevention.info:eu-repo/semantics/acceptedVersio

Asset pledgeability and endogenously leveraged bubbles

We develop a simple model of defaultable debt and rational bubbles in the price of an asset, which can be pledged as collateral in a competitive credit pool. When the asset pledgeability is low, the down payment is high, and bubble investment is unleveraged, as in a standard rational bubble model. When the pledgeability is high, the down payment is low, making it easier for leveraged borrowers to invest in the bubbly asset. As loans are packaged together into a competitive pool, the pricing of individual default risk may facilitate risk-taking. In equilibrium, credit-constrained borrowers may optimally choose a risky leveraged investment strategy – borrow to invest in the bubbly asset and default if the bubble bursts. The model predicts joint boom-bust cycles in asset prices and securitized credit

Examining Rational Bubbles in Oil Prices: Evidence from Frequency Domain Estimates

This study examined the existence of rational bubbles in oil prices by employing a frequency domain econophysics technique that have capacity to identify both explosive behaviour and bubbles in oil prices for the three largest oil future markets – WTI, Brent and OPEC basket. Our results show that the three prices experienced bubbles in four distinct periods. We attempt to provide some explanations on each of these bubbles using geopolitical, war and economic events. We equally noted that oil prices bubbles are largely influenced by the fact that oil is a major source of energy and is nonrenewable. The study observed that existence of bubbles have some economic consequences such as welfare loss resulting from distortion in prices and economic instability among others. We provide some policy recommendatio

Examining Rational Bubbles in Oil Prices: Evidence From Frequency Domain Estimates

This study examined the existence of rational bubbles in oil prices by employing a frequency domain econophysics technique that have capacity to identify both explosive behaviour and bubbles in oil prices for the three largest oil future markets – WTI, Brent and OPEC basket. Our results show that the three prices experienced bubbles in four distinct periods. We attempt to provide some explanations on each of these bubbles using geopolitical, war and economic events. We equally noted that oil prices bubbles are largely influenced by the fact that oil is a major source of energy and is non-renewable. The study observed that existence of bubbles have some economic consequences such as welfare loss resulting from distortion in prices and economic instability among others. We provide some policy recommendation. Keywords: oil prices, rational bubbles, energy JEL Classifications: C22, C50, G10, G12 DOI: https://doi.org/10.32479/ijeep.746

Bubble economics

This article provides a self-contained overview of the theory of rational asset price bubbles. We cover topics from basic definitions, properties, and classical results to frontier research, with an emphasis on bubbles attached to real assets such as stocks, housing, and land. The main message is that bubbles attached to real assets are fundamentally nonstationary phenomena related to unbalanced growth. We present a bare-bones model and draw three new insights: (i) the emergence of asset price bubbles is a necessity, instead of a possibility; (ii) asset pricing implications are markedly different between balanced growth of stationary nature and unbalanced growth of nonstationary nature; and (iii) asset price bubbles occur within larger historical trends involving shifts in industrial structure driven by technological innovation, including the transition from the Malthusian economy to the modern economy

Bubble Economics

This article provides a self-contained overview of the theory of rational asset price bubbles. We cover topics from basic definitions, properties, and classical results to frontier research, with an emphasis on bubbles attached to real assets such as stocks, housing, and land. The main message is that bubbles attached to real assets are fundamentally nonstationary phenomena related to unbalanced growth. We present a bare-bones model and draw three new insights: (i) the emergence of asset price bubbles is a necessity, instead of a possibility; (ii) asset pricing implications are markedly different between balanced growth of stationary nature and unbalanced growth of nonstationary nature; and (iii) asset price bubbles occur within larger historical trends involving shifts in industrial structure driven by technological innovation, including the transition from the Malthusian economy to the modern economy

On risk and market sentiments driving financial share price dynamics

The goal is to investigate the dynamics of banks’ share prices and related financials that lead to potential disruptions to credit and the economy. We adopt a classic macroeconomic equilibrium model with households, banks, and non-financial companies and explain both market valuations and endogenous debt constraints in terms of risk. Heterogeneous market dynamics ranging from equilibrium to cycles and chaos are illustrated. Deposits and equity are proven to be management levers for chaos control/anticontrol, and the only feasible equilibrium is unstable. Finally, using real-world data, a test is conducted on the suggested model proving that our framework conforms well to reality.Web of Science11117166041658

O impacto dos Asset Price Housing Bubbles no sistema financeiro dos Estados Unidos da América de 1990-2017

A presente Dissertação visa obter uma análise empírica relativamente à forma como o preço dos ativos funciona como impulsionador das bolhas especulativas no mercado imobiliário e se apresenta nos tempos atuais como um dos maiores desafios para a economia mundial. Neste estudo, analisou-se uma série temporal anual compreendida entre 1990 a 2017, que embora seja um período alargado relativamente à crise do subprime, procurou-se aumentar o período temporal de forma a obter um resultado mais eficaz do impacto das variáveis. Com os dados recolhidos, recorreu-se à estimação do modelo econométrico Vector Error Correction Model (VECM), e de diversos testes complementares ao modelo, entre eles, o teste de Wald, o teste de heterocedasticidade de Breusch-Pagan-Godfrey e a causalidade à Granger. Com estes pressupostos, foi possível concluir que ambas as variáveis não se sobrepunham entre elas e que não era possível rejeitar a hipótese nula, no entanto a taxa de juro veio desempenhar um impacto significativo no preço dos ativos.The present Dissertation aims to conduct an empirical analysis regarding the way asset prices works as a booster of the housing bubbles in real estate market, which constitutes one of the challenges for the global economy. In this study, we have analyzed an annual time series between 1990 to 2017, which even though is a larger period of time related to the subprime crisis, we searched to get a wider time window in order to obtain a more effective result of the impact of the variables. With the data obtained, we estimate the econometric model Vector Error Correction Model (VECM), and a variety of complementary tests to the model, for example, the Wald Test, the Breusch-Pagan-Godfrey heteroscedasticity test and the Granger Causality. With this assumption, it is possible to conclude that both variables do not overlap, and it was not possible to reject the Null Hypotheses, however the interest rate came to perform a significant impact in the asset price

Why Is It Difficult to Adopt Innovative Technologies? The Role of Coordination and Collateral Borrowing in Technology Adoption

Adopting highly innovative technologies is difficult due to many socioeconomic factors. We analyze the economic mechanisms associated with the large fixed costs jointly faced by various subsectors of an economy and the financing difficulty. We construct a Romer (1990) type growth model of technology adoption with fixed cost and then analyze macro dynamics showing why adopting innovative technology is difficult. We show that exercising coordination power in centralized economies can boost aggregate demand, facilitating the adoption of new technologies. Similarly, collateral lending in decentralized economies can play the role of helping technology adoption. Only when a threshold level of investment (i.e., the tipping point) is funded will the increasing returns to scale property arising from fixed costs generate a dynamic path toward a stable equilibrium with high output. We draw some implications