Quiet Bubbles

43 Pages Posted: 20 Nov 2012 Last revised: 26 Mar 2013

See all articles by Harrison G. Hong

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

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Date Written: November 2012

Abstract

Commentaries on the credit bubble of 2003-2007 routinely equate it with earlier episodes like the Internet boom. While credits were over-priced like Internet stocks a decade before, we show, using a model based on disagreement and short-sales constraints, that this is where the similarity ends. Equity bubbles are loud: price and volume go together as investors speculate on capital gains from reselling to more optimistic investors. But this resale option is limited for debt since its upside payoff is bounded. Debt bubbles then require an optimism bias among investors. But greater optimism leads to less speculative trading as investors view the debt as safe and having limited upside. Debt bubbles are hence quiet--high price comes with low volume. We find the predicted price-volume relationship of credits over the 2003-2007 credit boom.

Suggested Citation

Hong, Harrison G. and Sraer, David Alexandre, Quiet Bubbles (November 2012). NBER Working Paper No. w18547. Available at SSRN: https://ssrn.com/abstract=2178326

Harrison G. Hong (Contact Author)

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

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National Bureau of Economic Research (NBER)

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David Alexandre Sraer

University of California, Berkeley ( email )

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Princeton University ( email )

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Princeton, NJ 08544-0708
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