Essays in asset price bubbles

Ramanan, Sisir (2016) Essays in asset price bubbles. PhD thesis, University of Glasgow.

Abstract

This thesis studies the field of asset price bubbles. It is comprised of
three independent chapters. Each of these chapters either directly or
indirectly analyse the existence or implications of asset price bubbles.
The type of bubbles assumed in each of these chapters is consistent
with rational expectations. Thus, the kind of price bubbles investigated here are known as rational bubbles in the literature. The
following describes the three chapters.
Chapter 1: This chapter attempts to explain the recent US housing
price bubble by developing a heterogeneous agent endowment economy asset pricing model with risky housing, endogenous collateral
and defaults. Investment in housing is subject to an idiosyncratic risk
and some mortgages are defaulted in equilibrium. We analytically derive the leverage or the endogenous loan to value ratio. This variable
comes from a limited participation constraint in a one period mortgage contract with monitoring costs. Our results show that low values
of housing investment risk produces a credit easing effect encouraging
excess leverage and generates credit driven rational price bubbles in
the housing good. Conversely, high values of housing investment risk
produces a credit crunch characterized by tight borrowing constraints,
low leverage and low house prices. Furthermore, the leverage ratio was
found to be procyclical and the rate of defaults countercyclical consistent with empirical evidence.
Chapter 2: It is widely believed that financial assets have considerable
persistence and are susceptible to bubbles. However, identification of
this persistence and potential bubbles is not straightforward. This
chapter tests for price bubbles in the United States housing market
accounting for long memory and structural breaks. The intuition is
that the presence of long memory negates price bubbles while the
presence of breaks could artificially induce bubble behaviour. Hence,
we use procedures namely semi-parametric Whittle and parametric
ARFIMA procedures that are consistent for a variety of residual biases to estimate the value of the long memory parameter, d, of the
log rent-price ratio. We find that the semi-parametric estimation procedures robust to non-normality and heteroskedasticity errors found
far more bubble regions than parametric ones. A structural break was
identified in the mean and trend of all the series which when accounted
for removed bubble behaviour in a number of regions. Importantly, the
United States housing market showed evidence for rational bubbles at
both the aggregate and regional levels.
In the third and final chapter, we attempt to answer the following
question: To what extend should individuals participate in the stock
market and hold risky assets over their lifecycle? We answer this question by employing a lifecycle consumption-portfolio choice model with
housing, labour income and time varying predictable returns where
the agents are constrained in the level of their borrowing. We first
analytically characterize and then numerically solve for the optimal
asset allocation on the risky asset comparing the return predictability case with that of IID returns. We successfully resolve the puzzles
and find equity holding and participation rates close to the data. We
also find that return predictability substantially alter both the level of
risky portfolio allocation and the rate of stock market participation.
High factor (dividend-price ratio) realization and high persistence of
factor process indicative of stock market bubbles raise the amount of
wealth invested in risky assets and the level of stock market participation, respectively. Conversely, rare disasters were found to bring
down these rates, the change being severe for investors in the later
years of the life-cycle. Furthermore, investors following time varying
returns (return predictability) hedged background risks significantly
better than the IID ones.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Keywords: Asset bubble, leverage cycles, credit booms, housing bubble, stock market participation, lifecycle asset allocation.
• Subjects: H Social Sciences > HB Economic Theory; H Social Sciences > HG Finance
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
• Funder's Name: Economic & Social Research Council (ESRC)
• Supervisor's Name: Byrne, Professor Joe
• Date of Award: 2016
• Depositing User: Mr. Sisir Ramanan
• Unique ID: glathesis:2016-7357
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 31 May 2016 10:42
• Last Modified: 15 Jun 2016 07:56
• URI: https://theses.gla.ac.uk/id/eprint/7357