Asset Price Bubbles and Stock Market Interlinkages

WFIC Working Paper No. 02-22

Posted: 3 Sep 2002

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Douglas M. Gale

New York University (NYU) - Department of Economics

Date Written: April 2002

Abstract

The effect of stock market interlinkages on asset price bubbles are considered. Bubbles can occur when there is an agency problem between banks and the people they lend money to because the banks cannot observe how the funds are invested. This causes a risk shifting problem and asset prices are bid up above their fundamental. The greater is uncertainty about asset returns or about the amount of aggregate credit the greater is the bubble. Stock market interlinkages can moderate or exacerbate asset price bubbles.

Suggested Citation

Allen, Franklin and Gale, Douglas M., Asset Price Bubbles and Stock Market Interlinkages (April 2002). WFIC Working Paper No. 02-22. Available at SSRN: https://ssrn.com/abstract=313649

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Douglas M. Gale

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States
(212) 998-8944 (Phone)
(212) 995-3932 (Fax)

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