A Behavioral Model of the Credit Boom

David Peón (david.peon@udc.es), Anxo Calvo (anxo.calvo@udc.es) and Manel Antelo
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Anxo Calvo: Universidade da Coruña

No 57, Documentos de trabajo - Analise Economica from IDEGA - Instituto Universitario de Estudios e Desenvolvemento de Galicia

Abstract: We offer a simple model of herding and limits of arbitrage in retail credit markets that follows the behavioral approach of Shleifer (2000). We show why solely behavioral biases by participants in the industry could explain how a credit bubble might be fed by the banking sector. According to our model, optimistic banks would lead the industry while it would be rational for unbiased banks to herd under conditions we derive. An important finding is the role of limits of arbitrage in the industry: there would be no incentives for rational banks to correct the misallocations of their biased competitors.

Keywords: Credit bubbles; EMH; information economics; banking efficiency; behavioral finance; limits of arbitrage (search for similar items in EconPapers)
JEL-codes: D03 E32 G21 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2014-02
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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