By E. Porras
Asset bubbles and contagion have had a profound influence at the monetary markets after the monetary and sovereign debt crises. This publication takes a quantitative method of interpreting those phenomena and should entice practitioners who have to comprehend the repercussions of those occasions on buying and selling exchanges and the markets.
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Additional resources for Bubbles and Contagion in Financial Markets, Volume 1: An Integrative View
With respect to arbitrageurs, at times when they are fully invested and prices signiﬁcantly decrease, they might choose to bail out right when their participation is most needed. That is, when arbitrageurs face fund withdrawals they might opt to liquidate their positions out of fear that further adverse price movements might cause a drastic outﬂow of funds. In these instances, they are not very effective in betting against the mispricing,74 and that very liquidation results in the transmission of the crises.
Conditions Certain conditions reduce the set of possible bubbles. For instance, it has been argued that bubbles cannot grow in assets with upper-bounded prices, such as those having close substitutes. The reason is that consumers will replace the expensive asset with the substitute once the former becomes too pricey. It has also been proposed that a bubble in an asset cannot exist if the asset’s required rate of return is higher than the growth rate of the economy. 59 In scenarios where agents are perfectly rational and all information is available, a third suggestion is that a bubble cannot exist in the price of a ﬁnitely lived asset.
The usual offer was that shares could be purchased with a 10 percent deposit and the company could call in the remainder as needed. The deal offered was de facto a credit to prospective investors, therefore enlarging the company’s lenders’ pool. This fact, together with a solid marketing campaign promoting the railways as sound investments, resulted in thousands of investors, including citizens with very limited savings, purchasing large quantities of shares. The British railways regulation of those times could be described along laissez-faire lines.