Toxic asset bubbles

Abstract

We develop an overlapping generations model with leveraged investment in speculative asset bubbles. Financial intermediaries use borrowed funds to speculate on a risky asset bubble, which promises high returns as long as it does not collapse. They can, however, default on their debt and shift the losses to lenders when the bubble collapses. This risk shifting leads to welfare-reducing (or "toxic") rational asset bubbles. We then analyze a set of often discussed policy interventions: pricking bubbles, macroprudential regulations, and leverage restriction.

Asset Price Bubbles with Low Interest Rates: Not All Bubbles are Likely to Emerge

“…There exists an incomplete credit market in which young borrowers sell a one-period bond to young lenders. As borrowers cannot commit to paying all their outstanding debt, they issue a non-contingent standard debt contract, which is defaultable, and whose gross real interest rate charged, (1 + r t ), does not depend on the size of the loan (Allen and Gale, 2000;Ikeda and Phan, 2016). In case of default, lenders can repossess only a fraction of the original claims in the form of fundamental and bubbly collaterals.…”

“…22 The dierent denitions, short-term vs long-term, of the risk-free interest rate are consistent with the dierent interpretations of the OLG model. On the one hand, we can interpret birth/death as the entry/exit in the credit market (see, e.g., Bernanke and Gertler, 1989;Ikeda and Phan, 2016), and thus a period is the length of a loan contract, implying a short-term denition of the risk-free rate. On the other hand, we can interpret a period in the model as the length of a generation, and thus the risk-free interest rate as a long-term rate.…”

Tax Policy and Toxic Housing Bubbles in China

“…In addition, our paper considers only a simple tax policy. For future research, however, it would be interesting to analyze other types of government policies which are actively used in numerous countries, such as regulation on speculation (Hirano and Yanagawa 2017), loan-to-value (LTV) policy (Miao et al 2015), home-purchase restriction (Du and Zhang 2015), and leverage and collateral restriction (Zhao 2015;Ikeda and Phan 2016). These are all important issues for our future research.…”

Bubbly Markov equilibria

“…A final large and growing branch of the literature studies the existence and properties of bubbly equilibria in the presence of financial frictions. Representatives of this literature are Farhi & Tirole (2012), Martin & Ventura (2012), and, more recently, Ikeda & Phan (2016) or Miao, Wang & Xu (2016). In the present paper, we choose not to include such frictions for at least three reasons.…”