Trading frenzies and their impact on real investment

Goldstein, Itay; Ozdenoren, Emre; Yuan, Ke‐Hai

doi:10.1016/j.jfineco.2013.03.011

Cited by 239 publications

(100 citation statements)

References 36 publications

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“…This interpretation of the leverage constraint also highlights the connection to the literature on feedback effects of asset prices-the constraint captures, in reduced form, the feedback that arises when providers of capital learn from prices (as, for example, in Goldstein, Ozdenoren, and Yuan (2013)). …”

Section: Modelmentioning

confidence: 77%

“…In our view, this latter channel is particularly relevant for the recent discussion on short-sale bans, which has centered around financial institutions. A related feedback mechanism arises in Goldstein, Ozdenoren, and Yuan (2013). In their model, a provider of equity capital learns from the firm's stock price and provides less capital to the firm when he infers negative information from the firm's stock price.…”

Section: Introductionmentioning

confidence: 99%

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Predatory Short Selling

Brunnermeier

Oehmke

2013

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Financial institutions may be vulnerable to predatory short selling. When the stock of a financial institution is shorted aggressively, leverage constraints imposed by short-term creditors can force the institution to liquidate long-term investments at fire sale prices. For financial institutions that are sufficiently close to their leverage constraints, predatory short selling equilibria co-exist with no-liquidation equilibria (the vulnerability region) or may even be the unique equilibrium outcome (the doomed region). Increased coordination among short sellers expands the doomed region, where liquidation is the unique equilibrium. Our model provides a potential justification for temporary restrictions on short selling of vulnerable institutions and can be used to assess recent empirical evidence on short-sale bans.

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Section: Modelmentioning

confidence: 77%

Section: Introductionmentioning

confidence: 99%

Predatory Short Selling

Brunnermeier

Oehmke

2013

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“…As banks balance sheets are impaired they will cut back on their financing. And as asset prices decline and collateral becomes less valuable, final borrowers (corporations, households and sovereigns) have less access to finance, which worsens the real economy (Goldstein, Ozdenoren and Yuan, 2013). Even more generally, small financial shocks can trigger demand and other real sector externalities, including from capital flows, and aggravated by the zero lower bound on interest rates (see Korinek, 2011;Schmitt-Grohe and Uribe, 2012;Farhi and Werning, 2013;Korinek and Simsek, 2014).…”

Section: Externalities Related To Fire Sales and Credit Crunchesmentioning

confidence: 99%

An Overview of Macroprudential Policy Tools

2014

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Macroprudential policies -caps on loan to value ratios, limits on credit growth and other balance sheets restrictions, (countercyclical) capital and reserve requirements and surcharges, and Pigouvian levies -have become part of the policy paradigm in emerging markets and advanced countries alike. But knowledge is still limited on these tools. Macroprudential policies ought to be motivated by market failures and externalities, but these can be hard to identify. They can also interact with various other policies, such as monetary and microprudential, raising coordination issues. Some countries, especially emerging markets, have used these tools and analyses suggest that some can reduce procyclicality and crisis risks. Yet, much remains to be studied, including tools' costs  by adversely affecting resource allocations; how to best adapt tools to country circumstances; and preferred institutional designs, including how to address political economy risks. As such, policy makers should move carefully in adopting tools. JEL Classification Numbers: E43, E58, G18, G28

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“…In papers that feature such models (e.g., Ozdenoren and Yuan (2008), Bond, Goldstein, and Prescott (2010), Dow, Goldstein, and Guembel (2011), Goldstein, Ozdenoren, and Yuan (2013)), complementarities-driven multiplicity of equilibria arises also from the effect of the price on the asset's value. In our paper, the price at n = 2 (i.e., p 2 ) represents the asset's value from the perspective of investors at n = 1, and their trading also affects p 2 .…”

Section: Remarkmentioning

confidence: 99%

The Beauty Contest and Short-Term Trading

Cespa

Vives

2014

SSRN Journal

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Short-termism need not breed informational price inefficiency even when generating Beauty Contests. We demonstrate this claim in a two-period market with persistent liquidity trading and risk-averse, privately informed, short-term investors and find that prices reflect average expectations about fundamentals and liquidity trading. Informed investors engage in "retrospective" learning to reassess inferences (about fundamentals) made during the trading game's early stages. This behavior introduces strategic complementarities in the use of information and can yield two stable equilibria that can be ranked in terms of liquidity, volatility, and informational efficiency. We derive implications that explain market anomalies as well as empirical regularities.

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Trading frenzies and their impact on real investment

Cited by 239 publications

References 36 publications

Predatory Short Selling

Predatory Short Selling

An Overview of Macroprudential Policy Tools

The Beauty Contest and Short-Term Trading

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