Financing Harmful Bubbles

No 711, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: We model the stock market as a timing game, in which arbitrageurs who are not expected to be certainly rational compete over profit by bursting the bubble caused by investors' euphoria. The manager raises money by issuing shares and the arbitrageurs use leverage. If leverage is weakly regulated, it is the unique Nash equilibrium that the bubble persists for a long time. This holds even if the euphoria is negligible and all arbitrageurs are expected to be almost certainly rational. This bubble causes serious harm to the society, because the manager uses the money raised for his personal benefit.

Keywords: Euphoria; Leverage; Rational and Behavioral Arbitrageurs; Harmful Bubble; Unique Nash Equilibrium (search for similar items in EconPapers)
JEL-codes: C72 C73 D82 G14 (search for similar items in EconPapers)
Pages: 24pages
Date: 2010-08
New Economics Papers: this item is included in nep-cfn, nep-gth and nep-mic
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Financing Harmful Bubbles (2010)
Working Paper: Financing Harmful Bubbles (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:711

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