The Hazards of Propping Up: Bubbles and Chaos

Maymin, Philip

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The Hazards of Propping Up: Bubbles and Chaos

The International Journal of Business and Finance Research, Vol. 3, No. 2, pp. 83-93, 2009

11 Pages Posted: 12 Oct 2008 Last revised: 29 Jan 2010

See all articles by Philip Maymin

Philip Maymin

Fairfield University - Charles F. Dolan School of Business; Athletes Unlimited

Date Written: February 18, 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.

Keywords: bubbles, bailout, government, propping up, intervention

JEL Classification: G28, G11, G12, G13

Suggested Citation: Suggested Citation

Maymin, Philip, The Hazards of Propping Up: Bubbles and Chaos (February 18, 2009). The International Journal of Business and Finance Research, Vol. 3, No. 2, pp. 83-93, 2009 , Available at SSRN: https://ssrn.com/abstract=1282711