Market Depth, Leverage, and Speculative Bubbles

Arbeitspapier

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 optimally decide whether to lend to traders with limited liability. Bubbles increase welfare of the initial asset holders, but reduce welfare of future households. 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.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: ECONtribute Discussion Paper ; No. 058

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Financial Markets and the Macroeconomy ; Financial Crises ; Asset Pricing; Trading Volume; Bond Interest Rates
• Thema: Bubbles ; Rational Expectations ; Market Size ; Liquidity ; Financial Crises ; Leveraged Investment ; Capital Structure

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Enders, Zeno ; Hakenes, Hendrik
• Ereignis: Veröffentlichung
• (wer): University of Bonn and University of Cologne, Reinhard Selten Institute (RSI)
• (wo): Bonn and Cologne
• (wann): 2021

Weitere Informationen

• Handle: http://hdl.handle.net/10419/228861
• Letzte Aktualisierung: 10.03.2025, 11:42 MEZ