On reaching for yield and the coexistence of bubbles and negative bubbles

Viral Acharya and Hassan Naqvi

Journal of Financial Intermediation, 2019, vol. 38, issue C, 1-10

Abstract: We develop a model of financial intermediation wherein bank managers “reach for yield” – by overinvesting in risky assets and underinvesting in safer assets – provided they do not face much cost from liquidity shortfalls. The managers follow a pecking order in which their first preference is to invest in risky assets; their second preference is to hoard liquid assets; and their last preference is to invest in safer assets. This behavior is conducive to the formation of bubbles and “negative” bubbles in the market for risky and safer assets, respectively. Monetary loosening, by reducing the cost of liquidity shortfalls, induces further reach for yield and amplifies the bubbles.

Keywords: Bubbles; Monetary policy; Moral hazard; Negative bubbles; Reaching for yield; Risk-taking channel (search for similar items in EconPapers)
JEL-codes: D82 E32 E52 G21 G28 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1042957318300664
Full text for ScienceDirect subscribers only

Related works:
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:jfinin:v:38:y:2019:i:c:p:1-10

DOI: 10.1016/j.jfi.2018.08.001

Access Statistics for this article

Journal of Financial Intermediation is currently edited by Elu von Thadden

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