Quiet Bubbles / Harrison Hong, David Sraer.

Format:

Book

Author/Creator:

Hong, Harrison.

Contributor:

National Bureau of Economic Research.

Sraer, David.

Series:

Working Paper Series (National Bureau of Economic Research) no. w18547.

NBER working paper series no. w18547

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

Commentaries on the credit bubble of 2003-2007 routinely equate it with earlier episodes like the Internet boom. While credits were over-priced like Internet stocks a decade before, we show, using a model based on disagreement and short-sales constraints, that this is where the similarity ends. Equity bubbles are loud: price and volume go together as investors speculate on capital gains from reselling to more optimistic investors. But this resale option is limited for debt since its upside payoff is bounded. Debt bubbles then require an optimism bias among investors. But greater optimism leads to less speculative trading as investors view the debt as safe and having limited upside. Debt bubbles are hence quiet--high price comes with low volume. We find the predicted price-volume relationship of credits over the 2003-2007 credit boom.

Notes:

Print version record

November 2012.