Quiet Bubbles

44 Pages Posted: 22 Feb 2011 Last revised: 21 Nov 2011

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

David Alexandre Sraer

University of California, Berkeley; Princeton University

Multiple version iconThere are 2 versions of this paper

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 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.

Keywords: Bubbles, Financial Crisis, Sub-Prime Mortgage Securities, Credit

JEL Classification: G12, E50

Suggested Citation

Hong, Harrison G. and Sraer, David Alexandre, Quiet Bubbles (February 22, 2011). Available at SSRN: https://ssrn.com/abstract=1767453 or http://dx.doi.org/10.2139/ssrn.1767453

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Alexandre Sraer

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544
United States

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