Identifying Speculative Bubbles : A Two-Pillar Surveillance Framework / Bradley Jones.

Format:

Book

Government document

Author/Creator:

Jones, Bradley.

Contributor:

International Monetary Fund. Monetary and Capital Markets Department, issuing body.

Series:

IMF Working Papers; Working Paper ; No. 2014/208

IMF Working Papers

Language:

English

Subjects (All):

Stocks--Economic aspects--United States.

Stocks.

Financial risk management--United States.

Financial risk management.

Capital market--United States.

Capital market.

Bonds--United States.

Bonds.

Physical Description:

1 online resource (50 p.)

Place of Publication:

Washington, D.C. : International Monetary Fund, 2014.

Summary:

In the aftermath of the global financial crisis, the issue of how best to identify speculative asset bubbles (in real-time) remains in flux. This owes to the difficulty of disentangling irrational investor exuberance from the rational response to lower risk based on price behavior alone. In response, I introduce a two-pillar (price and quantity) approach for financial market surveillance. The intuition is straightforward: while asset pricing models comprise a valuable component of the surveillance toolkit, risk taking behavior, and financial vulnerabilities more generally, can also be reflected in subtler, non-price terms. The framework appears to capture stylized facts of asset booms and busts—some of the largest in history have been associated with below average risk premia (captured by the ‘pricing pillar’) and unusually elevated patterns of issuance, trading volumes, fund flows, and survey-based return projections (reflected in the ‘quantities pillar’). Based on a comparison to past boom-bust episodes, the approach is signaling mounting vulnerabilities in risky U.S. credit markets. Policy makers and regulators should be attune to any further deterioration in issuance quality, and where possible, take steps to ensure the post-crisis financial infrastructure is braced to accommodate a re-pricing in credit risk.

Contents:

Cover; Abstract; Contents; I. Introduction; II. A Review of Measurement and Inference Issues; Boxes; Box 1. Problems in Formal Tests of Speculative Bubbles; Box 2. Problems in Formal Tests of Speculative Bubbles; III. Operationalizing Surveillance of Asset Bubbles: A Two-Pillar Framework; Figures; Figure 1. Sensitivity to Discount Rates for the Fair Value of a Perpetuity; A. The Pricing Pillar; Tables; Table 1. Two-Pillar Framework for Asset Bubble Surveillance; Figure 2. The Rent/Price Ratio and Transaction Volumes: U.S. Housing Market; Figure 3. Empirical Determinants of Stock Returns

Figure 4. Valuation-based Asset Return PredictabilityFigure 5. Risk Premiums in the Years Before and After the Largest Busts; Figure 6. Risk Premia Preceding Large Busts, and Subsequent Asset Returns; Figure 7. Lead Time between Start of Asset Bust and Onset of Recession; Figure 8. Market-Implied Real Cost of Equity (Time Series); Figure 9. Market-Implied Real Cost of Equity across 25 Countries; Figure 10. Sovereign Bond Risk Premia (Time Series); Figure 11. Sovereign Bond Risk Premia (Cross Section); Figure 12. Yield-Based Expected Returns across Major U.S. Asset Classes

Figure 13. Average Expected Return across Major U.S. Asset ClassesB. The Quantities Pillar; Figure 14. Current vs. Fair Value Spreads on U.S. High Yield Securities; Figure 15. Structured Credit and ABS Market Issuance; Figure 16. High Yield Share of Credit Issuance Before/After Credit Blow-ups; Figure 17. U.S. Aggregate Net Equity Issuance vs. Equity Valuations; Figure 18. Global IPO Volumes vs. Stock Valuations; Figure 19. Issuance of Risky Credit Products; Figure 20. Annual Sovereign Debt Issuance for First Time Issuers; Figure 21. U.S. Net Stock Issuance

Figure 22. Activity in Worldwide Equity FinancingFigure 23. Equity Trading Volumes During/After Stock Price Booms; Figure 24. Trading Volumes in U.S. High Yield and Leveraged Loan Markets; Figure 25. Trading Volumes and Real Stock Prices; Figure 26. Fund Flows in the Years Before a Bust; Figure 27. Correlation of Fund Flows and Asset Class Returns; Figure 28. Cumulative Investor Fund Flows: Past 5-Years; Figure 29. Size of Asset Class Funds vs. 5-Year Cumulative Fund Flows; Figure 30. Survey-based vs. Objective Measures of Future U.S. Stock Returns; IV. Concluding Remarks and Future Research

AnnexesAnnex 1. Standard Testing Techniques for Speculative Bubbles; Annex 2. Estimates of Required/Expected Returns; References

Notes:

Description based upon print version of record.

Includes bibliographical references.

Description based on online resource; title from PDF title page (ebrary, viewed January 20, 2015).

ISBN:

9781498345804

1498345808

9781484394809

1484394801