Collateralisation bubbles when investors disagree about risk

Tobias Broer and Afroditi Kero

No 10148, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Survey respondents strongly disagree about return risks and, increasingly, macroeconomic uncertainty. This may have contributed to higher asset prices through increased use of collateralisation, which allows risk-neutral investors to realise perceived gains from trade. Investors with lower risk perceptions buy collateralised loans, whose downside-risk they perceive as small. Investors with higher risk perceptions buy upside-risk through asset purchase and collateralised loan issuance, raising prices. More complex collateralised contracts, like CDOs, can increase prices further. In contrast, with disagreement about mean payoffs, price bubbles arise without collateralisation, which may discipline prices as pessimists demand higher returns on risky loans.

Keywords: Asset prices; Bubbles; Disagreement; Heterogeneous beliefs; Volatility (search for similar items in EconPapers)
JEL-codes: D82 D83 E32 E44 G12 G14 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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