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Quiet BubblesHarrison G. HongPrinceton University - Department of Economics; National Bureau of Economic Research (NBER) David Alexandre SraerPrinceton University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) 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 payoff s 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.
Number of Pages in PDF File: 44 Keywords: Bubbles, Financial Crisis, Sub-Prime Mortgage Securities, Credit JEL Classification: G12, E50 working papers seriesDate posted: February 22, 2011 ; Last revised: November 21, 2011Suggested CitationContact Information
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