The Hazards of Propping Up: Bubbles and Chaos

Philip Maymin

Papers from arXiv.org

Abstract: In the current environment of financial distress, many governments are likely to soon become major holders of financial assets, but the policy debate focuses only on the likelihood and extent of short-term market stabilization. This paper shows that government intervention and propping up are likely to lead to long-term bubbles and even wildly chaotic behavior. The discontinuities occur when the committed capital reaches a critical amount that depends on just two parameters: the market impact of trading and the target exposure percentage.

Date: 2010-02
New Economics Papers: this item is included in nep-rmg
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Published in International Journal of Business and Finance Research 2009, vol. 3, no. 2, 83-93

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1002.2282

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