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The Hazards of Propping Up: Bubbles and ChaosPhilip MayminNYU Poly - Department of Finance and Risk Engineering February 18, 2009 The International Journal of Business and Finance Research, Vol. 3, No. 2, pp. 83-93, 2009 Abstract: In the current environment of financial distress, many governments are likely to soon become major holders of financial assets, but the policy debate focuses only on the likelihood and extent of short-term market stabilization. This paper shows that government intervention and propping up are likely to lead to long-term bubbles and even wildly chaotic behavior. The discontinuities occur when the committed capital reaches a critical amount that depends on just two parameters: the market impact of trading and the target exposure percentage.
Number of Pages in PDF File: 11 Keywords: bubbles, bailout, government, propping up, intervention JEL Classification: G28, G11, G12, G13 Accepted Paper SeriesDate posted: October 12, 2008 ; Last revised: January 30, 2010Suggested CitationContact Information
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