Template-Type: ReDIF-Article 1.0

Author-Name: Gergely Lakos
Author-Workplace-Name: Magyar Nemzeti Bank
Author-Email: lakosg@mnb.hu

Author-Name: Tibor Szendrei
Author-Workplace-Name: Magyar Nemzeti Bank
Author-Email: szendreit@mnb.hu

Title: Explanations of Asset Price Bubbles

Abstract: The study provides an overview of the theories explaining asset price bubbles found
in the literature. Six different explanations are identified that can cause asset price
bubbles on their own as well as in some combination: informational frictions, short
selling constraints, limited liability of financial intermediaries, herd behaviour
among market participants, perverse incentives in the provision of information,
and market participants’ bounded rationality. Mispricing arising from asset price
bubbles can considerably hamper the efficient allocation of resources, which may
warrant government intervention. Nevertheless, most of the underlying factors that
induce asset price bubbles can only be limited or offset rather than fully eliminated.
Financial stability is mainly threatened by debt-financed asset price bubbles.
With respect to asset price bubbles, the mandate and available instruments of
macroprudential policy are limited to the mitigation of cyclical fluctuations in the
related lending.

Classification-JEL: G10, G12, R31
Keywords: asset price bubble, excessive lending, bounded rationality, financial stability, macroprudential policy
Pages: 122-150
Volume: 16
Issue: 4
Year: 2017
File-URL: http://english.hitelintezetiszemle.hu/letoltes/fer-16-4-st5-lakos-szendrei.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:finrev:v:16:y:2017:i:4:p:122-150