Bubbles, Financial Crises, and Systemic Risk

Brunnermeier, Markus K.; Oehmke, Martin

doi:10.3386/w18398

Cited by 181 publications

(120 citation statements)

References 11 publications

Supporting

Mentioning

113

Contrasting

Unclassified

Order By: Relevance

“…These are regimes where investors are herding, following the flock and pushing the price up along an unsustainable growth trajectory. Many other mechanisms have been studied to explain the occurrence of financial bubbles, such as constraints on short selling and lack of synchronisation of arbitrageurs due to heterogeneous beliefs on the existence of a bubble, see Brunnermeier and Oehmke (2012) and Xiong (2013) for two excellent reviews.…”

Section: Phenomenology Of Financial Bubbles and Crashesmentioning

confidence: 99%

Physics and financial economics (1776–2014): puzzles, Ising and agent-based models

2014

View full text Add to dashboard Cite

This short review presents a selected history of the mutual fertilization between physics and economics, from Isaac Newton and Adam Smith to the present. The fundamentally different perspectives embraced in theories developed in financial economics compared with physics are dissected with the examples of the volatility smile and of the excess volatility puzzle. The role of the Ising model of phase transitions to model social and financial systems is reviewed, with the concepts of random utilities and the logit model as the analog of the Boltzmann factor in statistic physics. Recent extensions in term of quantum decision theory are also covered. A wealth of models are discussed briefly that build on the Ising model and generalize it to account for the many stylized facts of financial markets. A summary of the relevance of the Ising model and its extensions is provided to account for financial bubbles and crashes. The review would be incomplete if it would not cover the dynamical field of agent based models (ABMs), also known as computational economic models, of which the Ising-type models are just special ABM implementations. We formulate the "Emerging Market Intelligence hypothesis" to reconcile the pervasive presence of "noise traders" with the near efficiency of financial markets. Finally, we note that evolutionary biology, more than physics, is now playing a growing role to inspire models of financial markets.

show abstract

Section: Phenomenology Of Financial Bubbles and Crashesmentioning

confidence: 99%

Physics and financial economics (1776–2014): puzzles, Ising and agent-based models

2014

View full text Add to dashboard Cite

show abstract

“…The earlier development of bubbles in distant contracts can be considered as a price-disconnect between spot and futures markets. Although our theory points to rational bubbles as a possible explanation, we remain agnostic as to the cause and note that such bubbles could be underpinned by information frictions, differences of opinion, limits to arbitrage, excess speculation, or time-varying discount factors (see Brunnermeier and Oehmke, 2012;Singleton, 2014).…”

Section: Introductionmentioning

confidence: 98%

Bubbling over! The behaviour of oil futures along the yield curve

Tsvetanov

Coakley

Kellard

2016

Journal of Empirical Finance

View full text Add to dashboard Cite

Available online xxxx Using a rational bubble framework, a future spot price bubble can be shown to induce explosive behaviour in current long maturity futures prices under particular conditions. To assess this empirically, we employ a novel test of the unit root null against a mildly explosive alternative to investigate multiple bubbles in the crude oil spot and a range of futures prices along the yield curve employing monthly and weekly data from 1995 to 2013. The results indicate that the series overwhelmingly exhibit significant bubble periods ending in late 2008 even after allowing for an increase in unconditional volatility. Bubbles in the longer-dated contracts emerged as early as 2004 and are longer lasting than those in nearby and spot contracts. The bubble period was characterised by dramatic shifts in the yield curve associated with institutional spread positions that sharply increased futures prices at longer maturities. The results suggest that periods of time series disconnect between the spot and longer dated futures contracts could potentially form an input into early warning systems for macro-prudential policy.

show abstract

“…In their recent survey of the literature on bubbles, Brunnermeier and Oehmke (2013) concluded that "identifying bubbles in the data is a challenging task. The reason is that in FIGURE A.1.-U.K. sample-distribution of 700+ year leaseholds.…”

Section: A2 Existing Time-series Tests Of Rational Bubblesmentioning

confidence: 99%

No-Bubble Condition: Model-Free Tests in Housing Markets

Giglio¹,

Maggiori²,

Stroebel³

2016

Econometrica

View full text Add to dashboard Cite

We test for the existence of housing bubbles associated with a failure of the transversality condition that requires the present value of payments occurring infinitely far in the future to be zero. The most prominent such bubble is the classic rational bubble. We study housing markets in the United Kingdom and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are finite‐maturity, pre‐paid, and tradeable ownership contracts with maturities often exceeding 700 years. Freeholds are infinite‐maturity ownership contracts. The price difference between leaseholds with extremely‐long maturities and freeholds reflects the present value of a claim to the freehold after leasehold expiry, and is thus a direct empirical measure of the transversality condition. We estimate this price difference, and find no evidence of failures of the transversality condition in housing markets in the U.K. and Singapore, even during periods when a sizable bubble was regularly thought to be present.

show abstract

Bubbles, Financial Crises, and Systemic Risk

Cited by 181 publications

References 11 publications

Physics and financial economics (1776–2014): puzzles, Ising and agent-based models

Physics and financial economics (1776–2014): puzzles, Ising and agent-based models

Bubbling over! The behaviour of oil futures along the yield curve

No-Bubble Condition: Model-Free Tests in Housing Markets

Contact Info

Product

Resources

About