Bubbles and Leverage

Campbell, Gareth (2010): Bubbles and Leverage. Unpublished.

Abstract

This paper analyses the relationship between leverage and asset price bubbles. During an important historical bubble there was a substantial expansion in the number of railways promoted, most of which were financed by shares which could be purchased on an instalment basis. An analysis of a new and comprehensive dataset suggests that these assets can be modelled as futures or options, implying that investors were purchasing highly leveraged derivatives. The leverage embedded in these assets amplified returns and made it possible to obtain exposure to an asset for a small deposit. However, during the downturn negative returns were also magnified and investors had difficulties paying further instalments. Although leverage may have initially increased demand for these assets, they did not become overpriced, possibly due to a substantial increase in their supply.

• Item Type: MPRA Paper
• Language: English
• Keywords: bubbles, financial crises
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates; N - Economic History > N2 - Financial Markets and Institutions > N23 - Europe: Pre-1913; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing; G - Financial Economics > G0 - General > G01 - Financial Crises

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