Explanations of Asset Price Bubbles

Gergely Lakos () and Tibor Szendrei
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Gergely Lakos: Magyar Nemzeti Bank

Financial and Economic Review, 2017, vol. 16, issue 4, 122-150

Abstract: The study provides an overview of the theories explaining asset price bubbles found in the literature. Six different explanations are identified that can cause asset price bubbles on their own as well as in some combination: informational frictions, short selling constraints, limited liability of financial intermediaries, herd behaviour among market participants, perverse incentives in the provision of information, and market participants’ bounded rationality. Mispricing arising from asset price bubbles can considerably hamper the efficient allocation of resources, which may warrant government intervention. Nevertheless, most of the underlying factors that induce asset price bubbles can only be limited or offset rather than fully eliminated. Financial stability is mainly threatened by debt-financed asset price bubbles. With respect to asset price bubbles, the mandate and available instruments of macroprudential policy are limited to the mitigation of cyclical fluctuations in the related lending.

Keywords: asset price bubble; excessive lending; bounded rationality; financial stability; macroprudential policy (search for similar items in EconPapers)
JEL-codes: G10 G12 R31 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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