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1 – 10 of 384The causes for the formation of a bubble in the collateral market when agents are provided with homogeneous expectations are explored. This bubbly dynamics will define a…
Abstract
Purpose
The causes for the formation of a bubble in the collateral market when agents are provided with homogeneous expectations are explored. This bubbly dynamics will define a sufficient condition for deleveraging.
Design/methodology/approach
Theoretical approach with neutral deleveraging.
Findings
Findings of the study are defined sufficient conditions for a behavioral rational bubble's formation in a market of collateral and the subsequent deleveraging. The crowd-in effect of the representative bubble is caused by errors in extrapolating information and thus by representativeness, while the crowd-out effect of deleveraging is set off by reverting to a rational heuristic.
Research limitations/implications
The limit is that it is a homogeneous expectations approach, the implication is that cannot be rational speculation.
Practical implications
Even in a simple model of homogeneous expectations a bubble may arise with serious effect on the demand side: models that detect just rational mispricings cannot account for behavioral components that have financial and real effects.
Originality/value
The paper defines how deleveraging may occur even in case of homogeneous expectations. The latter should not be seen just as a limit but also as a signal of the importance of being aware of behavioral components.
Details
Keywords
Keunbae Ahn, Gerhard Hambusch, Kihoon Hong and Marco Navone
Throughout the 21st century, US households have experienced unprecedented levels of leverage. This dynamic has been exacerbated by income shortfalls during the COVID-19 crisis…
Abstract
Purpose
Throughout the 21st century, US households have experienced unprecedented levels of leverage. This dynamic has been exacerbated by income shortfalls during the COVID-19 crisis. Leveraging and deleveraging decisions affect household consumption. This study investigates the effect of the dynamics of household leverage and consumption on the stock market.
Design/methodology/approach
The authors explore the relation between household leverage and consumption in the context of the consumption capital asset pricing model (CCAPM). The authors test the model's implication that leverage has a negative risk premium by transforming the asset pricing restriction into an unconditional linear factor model and estimate the model using the general method of moments procedure. The authors run time-series regressions to estimate individual stocks' exposures to leverage, and cross-sectional regressions to investigate the leverage risk premium.
Findings
The authors show that shocks to household debt have strong and lasting effects on consumption growth. The authors extend the CCAPM to accommodate this effect and find, using various test assets, a negative risk premium associated with household deleveraging. Looking at individual stocks the authors show that the deleveraging risk premium is not explained by well-known risk factors.
Originality/value
This paper contributes to the literature on the role of leverage in economics and finance by establishing a relation between household leverage and spending decisions. The authors provide novel evidence that households' leveraging and deleveraging decisions can be a fundamental and influential force in determining asset prices. Further, this paper argues that household leverage might explain the small, persistent, and predictable component in consumption growth hypothesised in the long-run risk asset pricing literature.
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CHINA: Debt risks remain despite deleveraging success
China's state-owned enterprises.
An NPL overhang will crimp credit growth in Emerging Europe.
Jin Gi Kim, Hyun-Tak Lee and Bong-Gyu Jang
This paper examines whether the successful bid rate of the OnBid public auction, published by Korea Asset Management Corporation, can identify and forecast the Korea…
Abstract
Purpose
This paper examines whether the successful bid rate of the OnBid public auction, published by Korea Asset Management Corporation, can identify and forecast the Korea business-cycle expansion and contraction regimes characterized by the OECD reference turning points. We use logistic regression and support vector machine in performing the OECD regime classification and predicting three-month-ahead regime. We find that the OnBid auction rate conveys important information for detecting the coincident and future regimes because this information might be closely related to deleveraging regarding default on debt obligations. This finding suggests that corporate managers and investors could use the auction information to gauge the regime position in their decision-making. This research has an academic significance that reveals the relationship between the auction market and the business-cycle regimes.
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Growth and deleveraging in China.
Despite mounting pressure on Hungarian assets, partly stemming from the Greek crisis, and the end in May of a long spell of deflation, the Hungarian National Bank (MNB) expects to…