michigan-state-university-sports-flag.jpg

 

 

 

 

 

Michigan_State_University_220464.png

 

 

 

 

 

MSU_S.jpg

 

 

 

 

 

michigan-state-university-sports-flag.jpg

 

Research PAPERS BY ANTONIO DOBLAS-MADRID _________________________________________________________________________________

 

working papers / in progress

 

Credit-Fuelled Bubbles, with Kevin J. Lansing

ABSTRACT: In the context of recent housing busts in the United States and other countries, many observers have highlighted the role of credit and speculation in fueling unsustainable booms that lead to crises. Motivated by these observations, we develop a model of credit-fuelled bubbles in which lenders accept risky assets as collateral. Booming prices allow lenders to extend more credit, in turn allowing investors to bid prices even higher. Eager to profit from the boom for as long as possible, asymmetrically informed investors fuel and ride bubbles, buying overvalued assets in hopes of reselling at a profit to a greater fool. Lucky investors sell the bubbly asset at peak prices to unlucky ones, who buy in hopes that the bubble will grow at least a bit longer. In the end, unlucky investors suffer losses, default on their loans, and lose much of their collateral to lenders. The model has implications for macro-financial regulation, as higher interest rates and lower lending limits are shown to reduce or even eliminate bubbles.

 

A Finite Model of Riding Bubbles Forthcoming, Journal of Mathematical Economics Special Issue: Bubbles and Economic Theory II

ABSTRACT: When asset prices boom over extended periods of time, many investors begin to worry about bubbles. However, even those who believe that assets are overpriced may stay in the market believing that they can rise even further before correcting. Abreu and Brunnermeier (2003; AB) model this idea in an environment with rational and behavioral agents, and more recently, Doblas-Madrid (2012; D-M) constructs a fully rational version of the AB model. These models conceptualize a bubble as a boom that is at first justified by fundamentals, but overshoots as asymmetrically informed agents ride the bubble hoping to sell to a greater fool. A critique of these papers is that, although bubbles are finite, they can only arise in equilibrium if prices can grow at extraordinary rates indefinitely. In this paper, I articulate this critique in a simplified D-M environment and show how it can be overturned by modifying investors’ strategies. If the number of periods an investor plans to ride the bubble is conditional on her signal of fundamental value, one can sustain speculative bubbles in a finite model, where by construction it is impossible for prices to boom indefinitely.

 

A Theory of Speculative Bubbles and Overshooting during Currency Crises --- In Progress

 

 

Bubbles and Banks, with Raoul Minetti --- In Progress

 

 

Exchange Rate Mean Reversion and the PPP trade, with Dooyeon Cho --- Coming Soon

  

 

Gradually Bursting Bubbles in Walrasian Markets, with Luis Araujo --- Coming Soon

 

Published  papers

 

Trade Intensity and Purchasing Power Parity, with Dooyeon Cho, Journal of International Economics. 2014. Vol. 93(1), pp. 194-209.

 

Business Cycle Accounting East and West: Asian Finance and the Investment Wedge, with Dooyeon Cho, Review of Economic Dynamics. 2013. Vol. 16(4), pp. 724-744.

 

Sharing Information in the Credit Market: Contract-Level Evidence from U.S. Firms, with Raoul Minetti, Journal of Financial Economics. 2013. Vol. 109(1), pp. 198-223.

 

A Robust Model of Bubbles with Multidimensional UncertaintyEconometrica. 2012, Vol. 80(5), pp. 1845-93.

 

 

Fiscal Trends and Self-Fulfilling Crises, Review of International Economics. 2009. Vol. 17(1), pp. 187-204.

 

 

Understanding Business Cycles through Credit and Lease Contracts, with Raoul Minetti. Journal of Equipment Lease Financing. 2009.  Vol. 27(1), pp. 1-6.

 

 

Implications of Within-Period Timing in Models of Speculative Attack, Economics Bulletin. 2007. Vol. 6, No. 28 pp. 1-10.

 

 

_________________________________________________________________________________

 

michigan-state-university-sports-flag.jpg

 

 

 

 

 

Michigan_State_University_220464.png

 

 

 

 

 

MSU_S.jpg

 

 

 

 

 

michigan-state-university-sports-flag.jpg