Market Depth, Leverage, and Speculative Bubbles
Zeno Enders and
Hendrik Hakenes ()
Additional contact information
Hendrik Hakenes: University of Bonn, CEPR
No 58, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany
We develop a model of rational bubbles based on leverage and the assumption of an imprecisely known maximum market size. In a bubble, traders push the asset price above its fundamental value in a dynamic way, driven by rational expectations about future price developments. At a previously unknown date, the bubble will endogenously burst. Households optimally decide whether to lend to traders with limited liability. Bubbles increase welfare of the initial asset holders, but reduce welfare of future households. We provide general conditions for the possibility of bubbles depending on uncertainty about market size, traders' degree of leverage and the risk-free rate. This allows us to discuss several policy measures. Capital requirements and a correctly implemented Tobin tax can prevent bubbles. Implemented incorrectly, however, these measures may create the possibility of bubbles and can reduce welfare.
Keywords: Bubbles; Rational Expectations; Market Size; Liquidity; Financial Crises; Leveraged Investment; Capital Structure (search for similar items in EconPapers)
JEL-codes: E44 G01 G12 (search for similar items in EconPapers)
Pages: 50 pages
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_058_2021.pdf First version, 2021 (application/pdf)
Journal Article: Market Depth, Leverage, and Speculative Bubbles (2021)
Working Paper: Market Depth, Leverage, and Speculative Bubbles (2021)
Working Paper: Market Depth, Leverage, and Speculative Bubbles (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:058
Access Statistics for this paper
More papers in ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany Niebuhrstrasse 5, 53113 Bonn, Germany.
Bibliographic data for series maintained by ECONtribute Office ().