Deflating asset price bubbles with leverage constraints and monetary policy

Fenig, Guidon; Mileva, Mariya; Petersen, Luba

doi:10.1016/j.jebo.2018.06.021

Cited by 21 publications

(6 citation statements)

References 44 publications

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“…Wan [49], last, concludes that a mixture of heterogeneous beliefs, market frictions and speculative trading motives can be accountable for bubbles. Fenig et al [50] propose that leverage constraints do not only not prevent asset price bubbles but also drive prices higher. This is why participants supply more labor to obtain a wealth buffer stock.…”

Section: Literature Reviewmentioning

confidence: 99%

Detecting West Texas Intermediate (WTI) Prices’ Bubble Periods

Perifanis¹

2019

Energies

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Oil prices have had considerable surges and bursts since the first oil crisis of 1973. Until then its price was stable, with almost zero volatility. Since then, apart from the two oil crises of 1973 and 1978/9, oil prices had consecutive bubble episodes like the surges up to 2008 and 2014 and their successive bursts, respectively. The trace of these bubble periods is of crucial importance for policymakers, since their drivers and consequences impact global economic developments. Phillips et al. and Phillips et al. methodologies are applied to detect whether West Texas Intermediate prices experienced bubble periods. Both methodologies suggest that WTI prices experienced explosive episodes, which could be fundamentally, speculatively, or politically attributed. Some suggested periods coincide for both methods, but the second methodology seems to be more sensitive than its predecessor is, leading to better bubble detection but also to identification of non-existent bubbles. The identified bubble periods are compared to relevant research in the literature concerning their presence, duration, and explosiveness. The main goal of the research, apart from the detection of bubbles’ presence and duration, is to identify the causal underlying reasons for each explosive episode. Further, we compare the start and endpoints of each bubble episode with time-points when structural changes occurred. The contribution of the paper is that it clearly defines the bubble episodes with their corresponding drivers. The paper identifies the importance of market fundamentals’ swifts in explaining the bubble periods. The findings of the papers can help policymakers and other stakeholders to monitor oil price shifts and their underlying reasons, and then proceed with prompt actions. Since bubble episodes are fundamentally explained, then the practical utility is that by focusing on the market fundamentals, stakeholders can avoid actions that could result in market failures.

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Section: Literature Reviewmentioning

confidence: 99%

Detecting West Texas Intermediate (WTI) Prices’ Bubble Periods

Perifanis¹

2019

Energies

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“…Embedding an asset market in a general equilibrium framework to experimentally study the effects of monetary policy on bubbles in a more realistic setting is an important topic for future work. One suggestion would be to implement the production economy of Fenig, Mileva, and Petersen (2018) as a learning-to-forecast experiment, where subjects submit expectations but other decisions are optimized by the computer. This would bridge the gap between our study and the study of Fenig, Mileva, and Petersen by making it possible to focus on the role of expectations in a general equilibrium setting.…”

Section: Discussionmentioning

confidence: 99%

“…In addition, we consider three scenarios with different information about the policy, and a scenario in which the central bank uses a proxy for the steady-state fundamental price. Fenig, Mileva, and Petersen (2018) combine a production economy with an asset market. Participants submit labor supply, output demand, and asset trading decisions.…”

Section: Related Theoretical and Experimental Literaturementioning

confidence: 99%

Managing Bubbles in Experimental Asset Markets with Monetary Policy

Hennequin¹,

Hommes²

2023

J of Money Credit Banking

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We study the effect of a “leaning against the wind” monetary policy on asset price bubbles in a learning‐to‐forecast experiment, where prices are driven by the expectations of market participants. We find that a strong interest rate response is successful in preventing or deflating large price bubbles, while a weak response is not. Giving information about the interest rate changes and communicating the goal of the policy increases coordination of expectations and has a stabilizing effect. When the steady‐state fundamental price is unknown and the interest rate rule is based on a proxy instead, the policy is less effective.

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“…Following Guo and Li [47], we employed the gap between the growth rate of M2 and that of GDP to obtain the excess liquidity of M2. Recent studies from Fenig et al [48], Bao and Zong [49], Bolt et al [50], and Galí et al [51] all use the agent-based model to explain the influence of monetary policy on the asset price bubble.…”

Section: Theoretical Framework For Empirical Analysismentioning

confidence: 99%

Importance of Proper Monetary Liquidity: Sustainable Development of the Housing and Stock Markets

Chiang

Tsai

2020

Sustainability

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In this paper, we infer that when no excess monetary liquidity exists, people tend to invest available capital in assets associated with a high return or low risk. However, when excess monetary liquidity occurs, capital may successively boost asset markets, and the stock market wealth is thus likely to spill into housing markets, resulting in bubbles in these two markets and therefore in the unsustainable development of both the housing and stock markets. This paper uses relevant data from the United Kingdom from January 1991 to March 2020 to verify whether excess monetary liquidity is a crucial factor determining the relationship between the housing and stock markets. Continuous and structural changes are found to exist between housing price and stock price returns. This paper employs the time-varying coefficient method for estimation and determines that the influence of stock price returns on housing returns is dynamic, and an asymmetrical effect can occur according to whether excess monetary liquidity exists. An excessively loose monetary policy increases asset prices and can thus easily result in a mutual rise in asset markets. By contrast, when excess monetary liquidity does not exist, capital transfer among markets can prevent autocorrelation during excessive market investment and thereby aggravate market imbalance.

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Deflating asset price bubbles with leverage constraints and monetary policy

Cited by 21 publications

References 44 publications

Detecting West Texas Intermediate (WTI) Prices’ Bubble Periods

Detecting West Texas Intermediate (WTI) Prices’ Bubble Periods

Managing Bubbles in Experimental Asset Markets with Monetary Policy

Importance of Proper Monetary Liquidity: Sustainable Development of the Housing and Stock Markets

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