Quiet Bubbles
44 Pages Posted: 22 Feb 2011 Last revised: 21 Nov 2011
There are 2 versions of this paper
Quiet Bubbles
Quiet Bubbles
Date Written: February 22, 2011
Abstract
Classic speculative bubbles are loud: price is high and so are price volatility and share turnover. The credit bubble of 2003-2007 is quiet: price is high but price volatility and share turnover are low. We develop a model, based on investor disagreement and short-sales constraints, that explains why credit bubbles are quieter than equity ones. Since debt up-side payoffs are bounded, debt is less sensitive to disagreement about asset value than equity and hence has a smaller resale option and lower price volatility and turnover. While optimism makes both debt and equity bubbles larger, it makes debt mispricings quiet but leaves the loudness of equity mispricings unchanged. Our theory suggests a taxonomy of bubbles.
Keywords: Bubbles, Financial Crisis, Sub-Prime Mortgage Securities, Credit
JEL Classification: G12, E50
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Short Sale Constraints and Stock Returns
By Charles M. Jones and Owen A. Lamont
-
Short Sale Constraints and Stock Returns
By Charles M. Jones and Owen A. Lamont
-
Breadth of Ownership and Stock Returns
By Joseph Chen, Harrison G. Hong, ...
-
Breadth of Ownership and Stock Returns
By Joseph Chen, Harrison G. Hong, ...
-
Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs
By Owen A. Lamont and Richard H. Thaler
-
Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs
By Owen A. Lamont and Richard H. Thaler
-
Limited Arbitrage in Equity Markets
By Mark L. Mitchell, Todd C. Pulvino, ...
-
Dotcom Mania: The Rise and Fall of Internet Stock Prices
By Eli Ofek and Matthew P. Richardson
-
Dotcom Mania: The Rise and Fall of Internet Stock Prices
By Eli Ofek
-
Dotcom Mania: The Rise and Fall of Internet Stock Prices
By Eli Ofek and Matthew P. Richardson