Quiet bubbles

Harrison Hong and David Sraer

Journal of Financial Economics, 2013, vol. 110, issue 3, 596-606

Abstract: Motivated by the recent subprime mortgage crisis, we explore whether speculative bubble models of equity based on investor disagreement and short-sales constraints can also provide an explanation for the overvaluation of debt contracts. We find that this is unlikely. Equity bubbles are loud: price and volume go together as investors speculate on capital gains from reselling to more optimistic investors. But this resale option is limited for debt since its upside payoff is bounded. Debt bubbles then require an optimism bias among investors. But greater optimism leads to less speculative trading as investors view the debt as safe and having limited upside. Debt bubbles are hence quiet—high price comes with low volume. We find the predicted price–volume relationship of credits over the 2003–2007 credit boom.

Keywords: Bubbles; Credit; Asset prices; Turnover (search for similar items in EconPapers)
JEL-codes: D84 G12 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X13001979
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Quiet Bubbles (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:110:y:2013:i:3:p:596-606

DOI: 10.1016/j.jfineco.2013.07.002

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().