1932
0
  1. Home
  2. A-Z Publications
  3. Annual Review of Economics
  4. Volume 13, 2021
  5. Article

Annual Review of Economics

Volume 13, 2021

The Macroeconomics of Financial Speculation

Abstract

I review the literature on financial speculation driven by belief disagreements from a macroeconomics perspective. To highlight unifying themes, I develop a stylized macroeconomic model that embeds several mechanisms. With short-selling constraints, speculation can generate overvaluation and speculative bubbles. Leverage can substantially inflate speculative bubbles, and leverage limits depend on perceived downside risks. Shifts in beliefs about downside tail scenarios can explain the emergence and the collapse of leveraged speculative bubbles. Speculative bubbles are related to rational bubbles, but they match better the empirical evidence on the predictability of asset returns. Even without short-selling constraints, speculation induces procyclical asset valuation. When speculation affects the price of aggregate assets, it also influences macroeconomic outcomes such as aggregate consumption, investment, and output. Speculation in the boom years reduces asset prices, aggregate demand, and output in the subsequent recession. Macroprudential policies that restrict speculation in the boom can improve macroeconomic stability and social welfare.

Keyword(s): aggregate demand recessions, belief disagreements, business cycles, countercyclical risk premium, financial speculation, JEL E00, JEL E12, JEL E21, JEL E22, JEL E32, JEL E44, JEL E52, JEL E70, JEL G00, JEL G01, JEL G11, JEL G12, JEL G40, leverage, macroprudential policy, rational bubbles, short selling, speculative bubbles
Loading

Article metrics loading...

/content/journals/10.1146/annurev-economics-092120-050543
2021-08-05
2024-05-12
Loading full text...

Full text loading...

/deliver/fulltext/economics/13/1/annurev-economics-092120-050543.html?itemId=/content/journals/10.1146/annurev-economics-092120-050543&mimeType=html&fmt=ahah

Literature Cited

  1. Abreu D, Brunnermeier MK. 2003. Bubbles and crashes. Econometrica 71:173–204
     [Google Scholar]
  2. Adrian T, Shin HS 2010. Liquidity and leverage. J. Financ. Intermed. 19:418–37
     [Google Scholar]
  3. Albanesi S, De Giorgi G, Nosal J. 2017. Credit growth and the financial crisis: a new narrative NBER Work Pap. 23740
  4. Allen F, Barlevy G, Gale D. 2019. Asset price booms and macroeconomic policy: a risk-shifting approach Meet. Pap. 587 Soc. Econ. Dyn. Minneapolis, MN:
  5. Allen F, Gale D 2000. Bubbles and crises. Econ. J. 110:236–55
     [Google Scholar]
  6. Allen F, Gorton G. 1993. Churning bubbles. Rev. Econ. Stud. 60:813–36
     [Google Scholar]
  7. Asriyan V, Fornaro L, Martin A, Ventura J 2021. Monetary policy for a bubbly world. Rev. Econ. Stud. 88:1418–56
     [Google Scholar]
  8. Atmaz A, Basak S. 2018. Belief dispersion in the stock market. J. Finance 73:1225–79
     [Google Scholar]
  9. Atmaz A, Basak S, Ruan F. 2019. Dynamic equilibrium with costly short-selling and lending market. Unpublished manuscript Purdue Univ., West Lafayette IN:
     [Google Scholar]
  10. Bailey M, Cao R, Kuchler T, Stroebel J. 2018. The economic effects of social networks: evidence from the housing market. J. Political Econ. 126:2224–76
     [Google Scholar]
  11. Bailey M, Dávila E, Kuchler T, Stroebel J. 2019. House price beliefs and mortgage leverage choice. Rev. Econ. Stud. 86:2403–52
     [Google Scholar]
  12. Baker M, Stein JC, Wurgler J. 2003. When does the market matter? Stock prices and the investment of equity-dependent firms. Q. J. Econ. 118:969–1005
     [Google Scholar]
  13. Banerjee S, Kremer I. 2010. Disagreement and learning: dynamic patterns of trade. J. Finance 65:1269–302
     [Google Scholar]
  14. Barber BM, Lee YT, Liu YJ, Odean T. 2009. Just how much do individual investors lose by trading?. Rev. Financ. Stud. 22:609–32
     [Google Scholar]
  15. Barber BM, Odean T 2013. The behavior of individual investors. Handbook of the Economics of Finance 2B G Constantinides, M Harris, R Stulz 1533–70 Amsterdam: Elsevier
     [Google Scholar]
  16. Barberis N, Greenwood R, Jin L, Shleifer A 2015. X-CAPM: an extrapolative capital asset pricing model. J. Financ. Econ. 115:1–24
     [Google Scholar]
  17. Barberis N, Greenwood R, Jin L, Shleifer A 2018. Extrapolation and bubbles. J. Financ. Econ. 129:203–27
     [Google Scholar]
  18. Barberis N, Shleifer A, Vishny R. 1998. A model of investor sentiment. J. Financ. Econ. 49:307–43
     [Google Scholar]
  19. Barberis N, Thaler R 2003. A survey of behavioral finance. Handbook of the Economics of Finance, Vol. 1 G Constantinides, M Harris, R Stulz 1053–128 Amsterdam: Elsevier
     [Google Scholar]
  20. Barlevy G 2012. Rethinking theoretical models of bubbles. New Perspectives on Asset Price Bubbles DD Evanoff, GG Kaufman, AG Malliaris 41–62 Oxford, UK: Oxford Univ. Press
     [Google Scholar]
  21. Baron M, Xiong W. 2017. Credit expansion and neglected crash risk. Q. J. Econ. 132:713–64
     [Google Scholar]
  22. Barsky RB, De Long JB. 1993. Why does the stock market fluctuate?. Q. J. Econ. 108:291–311
     [Google Scholar]
  23. Basu S, Bundick B. 2017. Uncertainty shocks in a model of effective demand. Econometrica 85:937–58
     [Google Scholar]
  24. Bayer P, Geissler C, Mangum K, Roberts JW. 2020. Speculators and middlemen: the strategy and performance of investors in the housing market. Rev. Financ. Stud. 33:5212–47
     [Google Scholar]
  25. Beaudry P, Portier F. 2006. Stock prices, news, and economic fluctuations. Am. Econ. Rev. 96:1293–307
     [Google Scholar]
  26. Beber A, Pagano M. 2013. Short-selling bans around the world: evidence from the 2007–09 crisis. J. Finance 68:343–81
     [Google Scholar]
  27. Bénabou R, Tirole J. 2016. Mindful economics: the production, consumption, and value of beliefs. J. Econ. Perspect. 30:3141–64
     [Google Scholar]
  28. Bernanke BS, Gertler M, Gilchrist S 1999. The financial accelerator in a quantitative business cycle framework. Handbook of Macroeconomics 1C JB Taylor, M Woodford 1341–93 Amsterdam: North-Holland
     [Google Scholar]
  29. Bhamra HS, Uppal R. 2014. Asset prices with heterogeneity in preferences and beliefs. Rev. Financ. Stud. 27:519–80
     [Google Scholar]
  30. Bigio S, Zilberman E. 2019. Speculation-driven business cycles. Unpublished manuscript Univ. Calif. Los Angeles:
     [Google Scholar]
  31. Biswas S, Hanson A, Phan T. 2020. Bubbly recessions. Am. Econ. J. Macroecon. 12:33–70
     [Google Scholar]
  32. Blanchard OJ. 1985. Debt, deficits, and finite horizons. J. Political Econ. 93:223–47
     [Google Scholar]
  33. Blanchard OJ, Rhee C, Summers L. 1993. The stock market, profit, and investment. Q. J. Econ. 108:115–36
     [Google Scholar]
  34. Blume L, Cogley T, Easley D, Sargent T, Tsyrennikov V. 2018. A case for incomplete markets. J. Econ. Theory 178:191–221
     [Google Scholar]
  35. Blume L, Easley D. 2006. If you're so smart, why aren't you rich? Belief selection in complete and incomplete markets. Econometrica 74:929–66
     [Google Scholar]
  36. Blume L, Easley D. 2010. Heterogeneity, selection, and wealth dynamics. Annu. Rev. Econ. 2:425–50
     [Google Scholar]
  37. Boehme RD, Danielsen BR, Sorescu SM. 2006. Short-sale constraints, differences of opinion, and overvaluation. J. Financ. Quant. Anal. 41:455–87
     [Google Scholar]
  38. Boehmer E, Jones CM, Zhang X. 2013. Shackling short sellers: the 2008 shorting ban. Rev. Financ. Stud. 26:1363–400
     [Google Scholar]
  39. Bolton P, Scheinkman J, Xiong W. 2006. Executive compensation and short-termist behaviour in speculative markets. Rev. Econ. Stud. 73:577–610
     [Google Scholar]
  40. Bordalo P, Gennaioli N, Kwon SY Shleifer A. 2020a. Diagnostic bubbles. J. Financ. Econ. In press
    [Google Scholar]
  41. Bordalo P, Gennaioli N, Ma Y, Shleifer A. 2020b. Overreaction in macroeconomic expectations. Am. Econ. Rev. 110:92748–82
     [Google Scholar]
  42. Bordalo P, Gennaioli N, Shleifer A. 2018. Diagnostic expectations and credit cycles. J. Finance 73:199–227
     [Google Scholar]
  43. Bordalo P, Gennaioli N, Shleifer A, Terry SJ. 2021. Real credit cycles NBER Work Pap. 28416
  44. Borio CE. 2014. Monetary policy and financial stability: what role in prevention and recovery? BIS Work. Pap. 440 Bank Int. Settl. Basel, Switz:.
  45. Borovička J. 2020. Survival and long-run dynamics with heterogeneous beliefs under recursive preferences. J. Political Econ. 128:206–51
     [Google Scholar]
  46. Bris A, Goetzmann WN, Zhu N. 2007. Efficiency and the bear: short sales and markets around the world. J. Finance 62:1029–79
     [Google Scholar]
  47. Broer T. 2018. Securitization bubbles: structured finance with disagreement about default risk. J. Financ. Econ. 127:505–18
     [Google Scholar]
  48. Brunnermeier MK, Nagel S. 2004. Hedge funds and the technology bubble. J. Finance 59:2013–40
     [Google Scholar]
  49. Brunnermeier MK, Oehmke M 2013. Bubbles, financial crises, and systemic risk. Handbook of the Economics of Finance 2B G Constantinides, M Harris, R Stulz 1221–88 Amsterdam: Elsevier
     [Google Scholar]
  50. Brunnermeier MK, Sannikov Y. 2014. A macroeconomic model with a financial sector. Am. Econ. Rev. 104:379–421
     [Google Scholar]
  51. Brunnermeier MK, Parker JA. 2005. Optimal expectations. Am. Econ. Rev. 95:41092–118
     [Google Scholar]
  52. Brunnermeier MK, Schnabel I 2015. Bubbles and central banks: historical perspectives. Central Banks at a Crossroads: What Can We Learn from History? MD Bordo, Ø Eitrheim, M Flandreau, JF Qvigstad 493–562 Cambridge, UK: Cambridge Univ. Press
     [Google Scholar]
  53. Brunnermeier MK, Simsek A, Xiong W. 2014. A welfare criterion for models with distorted beliefs. Q. J. Econ. 129:1753–97
     [Google Scholar]
  54. Buraschi A, Jiltsov A. 2006. Model uncertainty and option markets with heterogeneous beliefs. J. Finance 61:2841–97
     [Google Scholar]
  55. Burnside C, Eichenbaum M, Rebelo S. 2016. Understanding booms and busts in housing markets. J. Political Econ. 124:1088–147
     [Google Scholar]
  56. Caballero RJ, Farhi E. 2018. The safety trap. Rev. Econ. Stud. 85:223–74
     [Google Scholar]
  57. Caballero RJ, Krishnamurthy A. 2001. International and domestic collateral constraints in a model of emerging market crises. J. Monet. Econ. 48:513–48
     [Google Scholar]
  58. Caballero RJ, Simsek A. 2020. A risk-centric model of demand recessions and speculation. Q. J. Econ. 135:1493–566
     [Google Scholar]
  59. Caballero RJ, Simsek A. 2021a. A model of endogenous risk intolerance and LSAPs: asset prices and aggregate demand in a “Covid-19” shock. Rev. Financ. Stud. In press https://doi.org/10.1093/rfs/hhab036
     [Crossref] [Google Scholar]
  60. Caballero RJ, Simsek A. 2021b. Prudential monetary policy NBER Work Pap. 25977
  61. Campbell JY, Lo AW, MacKinlay AC. 1997. The Econometrics of Financial Markets Princeton, NJ: Princeton Univ. Press
  62. Cao D. 2018. Speculation and financial wealth distribution under belief heterogeneity. Econ. J. 128:2258–81
     [Google Scholar]
  63. Chen J, Hong H, Stein JC. 2002. Breadth of ownership and stock returns. J. Financ. Econ. 66:171–205
     [Google Scholar]
  64. Chinco A, Mayer C. 2016. Misinformed speculators and mispricing in the housing market. Rev. Financ. Stud. 29:486–522
     [Google Scholar]
  65. Chirinko RS, Schaller H. 2001. Business fixed investment and “bubbles”: the Japanese case. Am. Econ. Rev. 91:663–80
     [Google Scholar]
  66. Chodorow-Reich G, Nenov PT, Simsek A. 2021. Stock market wealth and the real economy: a local labor market approach. Am. Econ. Rev. 111:1613–57
     [Google Scholar]
  67. Chu Y, Hirshleifer D, Ma L. 2016. The causal effect of limits to arbitrage on asset pricing anomalies. J. Finance 75:2631–72
     [Google Scholar]
  68. Cieslak A, Vissing-Jorgensen A. 2020. The economics of the Fed put. Rev. Financ. Stud. In press https://doi.org/10.1093/rfs/hhaa116
     [Crossref] [Google Scholar]
  69. Cochrane JH. 2011. Presidential address: discount rates. J. Finance 66:1047–108
     [Google Scholar]
  70. Cutler DM. 1990. Speculative dynamics and the role of feedback traders. Am. Econ. Rev. 80:63–68
     [Google Scholar]
  71. Daniel K, Hirshleifer D. 2015. Overconfident investors, predictable returns, and excessive trading. J. Econ. Perspect. 29:61–88
     [Google Scholar]
  72. Dávila E. 2020. Optimal financial transaction taxes NBER Work Pap. 27826
  73. Dávila E, Korinek A. 2018. Pecuniary externalities in economies with financial frictions. Rev. Econ. Stud. 85:352–95
     [Google Scholar]
  74. Dávila E, Walther A 2020. Prudential policy with distorted beliefs Unpublished manuscript Yale Univ. New Haven, CT:
  75. De Long JB, Shleifer A, Summers LH, Waldmann RJ. 1990a. Noise trader risk in financial markets. J. Political Econ. 98:703–38
     [Google Scholar]
  76. De Long JB, Shleifer A, Summers LH, Waldmann RJ. 1990b. Positive feedback investment strategies and destabilizing rational speculation. J. Finance 45:379–95
     [Google Scholar]
  77. DeFusco AA, Nathanson CG, Zwick E. 2017. Speculative dynamics of prices and volume NBER Work Pap. 23449
  78. Detemple J, Murthy S. 1994. Intertemporal asset pricing with heterogeneous beliefs. J. Econ. Theory 62:294–320
     [Google Scholar]
  79. Diamond PA. 1965. National debt in a neoclassical growth model. Am. Econ. Rev. 55:1126–50
     [Google Scholar]
  80. Diether KB, Malloy CJ, Scherbina A. 2002. Differences of opinion and the cross section of stock returns. J. Finance 57:2113–41
     [Google Scholar]
  81. Duffie D 2014. Challenges to a policy treatment of speculative trading motivated by differences in beliefs. J. Legal Stud. 43:S173–82
     [Google Scholar]
  82. Dumas B, Kurshev A, Uppal R. 2009. Equilibrium portfolio strategies in the presence of sentiment risk and excess volatility. J. Finance 64:579–629
     [Google Scholar]
  83. Eggertsson GB, Krugman P. 2012. Debt, deleveraging, and the liquidity trap: a Fisher-Minsky-Koo approach. Q. J. Econ. 127:31469–513
     [Google Scholar]
  84. Eyster E, Rabin M, Vayanos D. 2019. Financial markets where traders neglect the informational content of prices. J. Finance 74:371–99
     [Google Scholar]
  85. Farhi E, Werning I. 2016. A theory of macroprudential policies in the presence of nominal rigidities. Econometrica 84:51645–704
     [Google Scholar]
  86. Farhi E, Werning I. 2020. Taming a Minsky cycle IGIER Semin. Pap., Univ. Bocconi Milan, Italy:
  87. Fostel A, Geanakoplos J. 2008. Leverage cycles and the anxious economy. Am. Econ. Rev. 98:1211–44
     [Google Scholar]
  88. Fostel A, Geanakoplos J. 2012. Tranching, CDS, and asset prices: how financial innovation can cause bubbles and crashes. Am. Econ. J. Macroecon. 4:190–225
     [Google Scholar]
  89. Fostel A, Geanakoplos J. 2014. Endogenous collateral constraints and the leverage cycle. Annu. Rev. Econ. 6:771–99
     [Google Scholar]
  90. Fostel A, Geanakoplos J. 2015. Leverage and default in binomial economies: a complete characterization. Econometrica 83:2191–229
     [Google Scholar]
  91. Fostel A, Geanakoplos J, Phelan G. 2019. Global collateral and capital flows NBER Work Pap. 25583
  92. Friedman M. 1953. Essays in Positive Economics Chicago: Univ. Chicago Press
  93. Fuster A, Hebert B, Laibson D. 2012. Natural expectations, macroeconomic dynamics, and asset pricing. NBER Macroecon. Annu. 26:1–48
     [Google Scholar]
  94. Galí J. 2014. Monetary policy and rational asset price bubbles. Am. Econ. Rev. 104:721–52
     [Google Scholar]
  95. Galí J. 2021. Monetary policy and bubbles in a new Keynesian model with overlapping generations. Am. Econ. J. Macroecon. 13:2121–67
     [Google Scholar]
  96. Gao Z, Sockin M, Xiong W. 2020. Economic consequences of housing speculation. Rev. Financ. Stud. 33:5248–87
     [Google Scholar]
  97. Gayer G, Gilboa I, Samuelson L, Schmeidler D. 2014. Pareto efficiency with different beliefs. J. Legal Stud. 43:S2S151–71
     [Google Scholar]
  98. Geanakoplos J. 2010. The leverage cycle. NBER Macroecon. Annu. 24:1–66
     [Google Scholar]
  99. Geerolf F. 2018. Leverage and disagreement Unpublished manuscript Univ. Calif. Los Angeles:
  100. Gennaioli N, Shleifer A. 2020. A Crisis of Beliefs Princeton, NJ: Princeton Univ. Press
  101. Gertler M, Gilchrist S. 2018. What happened: financial factors in the Great Recession. J. Econ. Perspect. 32:3–30
     [Google Scholar]
  102. Gertler M, Kiyotaki N 2010. Financial intermediation and credit policy in business cycle analysis. Handbook of Monetary Economics 3 BM Friedman, M Woodford 547–99 Amsterdam: Elsevier
     [Google Scholar]
  103. Giglio S, Maggiori M, Stroebel J, Utkus S. 2021. Five facts about beliefs and portfolios. Am. Econ. Rev. 111:1481–522
     [Google Scholar]
  104. Gilboa I, Samet D, Schmeidler D. 2004. Utilitarian aggregation of beliefs and tastes. J. Political Econ. 112:932–38
     [Google Scholar]
  105. Gilboa I, Samuelson L, Schmeidler D. 2014. No-betting-Pareto dominance. Econometrica 82:1405–42
     [Google Scholar]
  106. Gilchrist S, Himmelberg CP, Huberman G. 2005. Do stock price bubbles influence corporate investment?. J. Monet. Econ. 52:805–27
     [Google Scholar]
  107. Gilchrist S, Zakrajšek E. 2012. Credit spreads and business cycle fluctuations. Am. Econ. Rev. 102:1692–720
     [Google Scholar]
  108. Gong F, Phelan G. 2020. Debt collateralization, capital structure, and maximal leverage. Econ. Theory 70:579–605
     [Google Scholar]
  109. Gourio F, Kashyap AK, Sim JW. 2018. The trade offs in leaning against the wind. IMF Econ. Rev. 66:70–115
     [Google Scholar]
  110. Greenwood R, Hanson SG, Shleifer A, Sørensen JA. 2020. Predictable financial crises NBER Work Pap. 27396
  111. Greenwood R, Shleifer A. 2014. Expectations of returns and expected returns. Rev. Financ. Stud. 27:714–46
     [Google Scholar]
  112. Greenwood R, Shleifer A, You Y. 2019. Bubbles for Fama. J. Financ. Econ. 131:20–43
     [Google Scholar]
  113. Guerrieri V, Lorenzoni G. 2017. Credit crises, precautionary savings, and the liquidity trap. Q. J. Econ. 132:31427–67
     [Google Scholar]
  114. Guren AM, McKay A, Nakamura E, Steinsson J. 2021. Housing wealth effects: the long view. Rev. Econ. Stud. 88:2669–707
     [Google Scholar]
  115. Guzman M, Stiglitz JE. 2021. Pseudo-wealth and consumption fluctuations. Econ. J. 131:372–92
     [Google Scholar]
  116. Haddad V, Ho P, Loualiche E. 2020. Bubbles and the value of innovation FRB Richmond Work Pap. 20-08 Fed. Reserve Bank, Richmond, VA:
  117. Hammond PJ. 1981. Ex-ante and ex-post welfare optimality under uncertainty. Economica 48:235–50
     [Google Scholar]
  118. Hanson A, Phan T. 2017. Bubbles, wage rigidity, and persistent slumps. Econ. Lett. 151:66–70
     [Google Scholar]
  119. Harris M, Raviv A. 1993. Differences of opinion make a horse race. Rev. Financ. Stud. 6:473–506
     [Google Scholar]
  120. Harris R. 1978. Ex-post efficiency and resource allocation under uncertainty. Rev. Econ. Stud. 45:427–36
     [Google Scholar]
  121. Harrison JM, Kreps DM. 1978. Speculative investor behavior in a stock market with heterogeneous expectations. Q. J. Econ. 92:323–36
     [Google Scholar]
  122. Haughwout A, Lee D, Tracy JS, Van der Klaauw W. 2011. Real estate investors, the leverage cycle, and the housing market crisis Staff Rep., Fed. Reserve Bank New York:
  123. He Z, Krishnamurthy A. 2013. Intermediary asset pricing. Am. Econ. Rev. 103:732–70
     [Google Scholar]
  124. Heimer R, Simsek A. 2019. Should retail investors' leverage be limited?. J. Financ. Econ. 132:1–21
     [Google Scholar]
  125. Heyerdahl-Larsen C, Walden J 2019. Welfare in production economies with heterogeneous beliefs Work. Pap. Univ. Calif. Berkeley:
  126. Hirshleifer D. 2001. Investor psychology and asset pricing. J. Finance 56:1533–97
     [Google Scholar]
  127. Hirshleifer D, Li J, Yu J 2015. Asset pricing in production economies with extrapolative expectations. J. Monet. Econ. 76:87–106
     [Google Scholar]
  128. Holmström B, Tirole J. 1998. Private and public supply of liquidity. J. Political Econ. 106:1–40
     [Google Scholar]
  129. Hong H, Sraer DA. 2016. Speculative betas. J. Finance 71:2095–144
     [Google Scholar]
  130. Hong H, Stein JC. 1999. A unified theory of underreaction, momentum trading, and overreaction in asset markets. J. Finance 54:2143–84
     [Google Scholar]
  131. Hong H, Stein JC. 2007. Disagreement and the stock market. J. Econ. Perspect. 21:109–28
     [Google Scholar]
  132. Iachan FS, Nenov PT, Simsek A. 2021. The choice channel of financial innovation. Am. Econ. J. Macroecon. 13:333–72
     [Google Scholar]
  133. Iacovello M. 2005. House prices, borrowing constraints, and monetary policy in the business cycle. Am. Econ. Rev. 95:3739–64
     [Google Scholar]
  134. Ilut CL, Schneider M. 2014. Ambiguous business cycles. Am. Econ. Rev. 104:2368–99
     [Google Scholar]
  135. Jones CM, Lamont OA. 2002. Short-sale constraints and stock returns. J. Financ. Econ. 66:207–39
     [Google Scholar]
  136. Jordà Ò, Schularick M, Taylor AM. 2015. Leveraged bubbles. J. Monet. Econ. 76:S1–20
     [Google Scholar]
  137. Kandel E, Pearson ND. 1995. Differential interpretation of public signals and trade in speculative markets. J. Political Econ. 103:831–72
     [Google Scholar]
  138. Kekre R, Lenel M. 2020. Monetary policy, redistribution, and risk premia Becker Friedman Inst. Econ. Work. Pap. Univ. Chicago Chicago:
  139. Keynes JM. 1936. The General Theory of Employment, Interest, and Money. London: Macmillan
  140. Kindleberger CP. 1978. Manias, Panics and Crashes: A History of Financial Crises. New York: Basic Books
  141. Kiyotaki N, Moore J. 1997. Credit cycles. J. Political Econ. 105:211–48
     [Google Scholar]
  142. Korinek A, Simsek A. 2016. Liquidity trap and excessive leverage. Am. Econ. Rev. 106:699–738
     [Google Scholar]
  143. Krishnamurthy A, Li W. 2020. Dissecting mechanisms of financial crises: intermediation and sentiment NBER Work Pap. 27088
  144. Krishnamurthy A, Muir T. 2017. How credit cycles across a financial crisis NBER Work Pap. 23850
  145. Kubler F, Schmedders K. 2012. Financial innovation and asset price volatility. Am. Econ. Rev. 102:147–51
     [Google Scholar]
  146. Lamont OA, Thaler RH. 2003a. Anomalies: the law of one price in financial markets. J. Econ. Perspect. 17:191–202
     [Google Scholar]
  147. Lamont OA, Thaler RH. 2003b. Can the market add and subtract? Mispricing in tech stock carveouts. J. Political Econ. 111:227–68
     [Google Scholar]
  148. Lewis M. 2011. The Big Short: Inside the Doomsday Machine London: Penguin
  149. L'Huillier J-P, Singh SR, Yoo D 2021. Diagnostic expectations and macroeconomic volatility Work. Pap., Univ. Calif. Davis:
  150. Lorenzoni G. 2008. Inefficient credit booms. Rev. Econ. Stud. 75:809–33
     [Google Scholar]
  151. Lorenzoni G. 2009. A theory of demand shocks. Am. Econ. Rev. 99:2050–84
     [Google Scholar]
  152. Ma Y, Paligorova T, Peydró J-L. 2021. Expectations and bank lending Work. Pap. Chicago Booth Sch. Bus., Chicago:
  153. Majlesi K, Di Maggio M, Kermani A. 2020. Stock market returns and consumption. J. Finance 75:3175–219
     [Google Scholar]
  154. Malmendier U, Nagel S. 2011. Depression babies: Do macroeconomic experiences affect risk taking?. Q. J. Econ. 126:373–416
     [Google Scholar]
  155. Malmendier U, Pouzo D, Vanasco V. 2020. Investor experiences and financial market dynamics. J. Financ. Econ. 136:597–622
     [Google Scholar]
  156. Martin A, Ventura J. 2018. The macroeconomics of rational bubbles: a user's guide. Annu. Rev. Econ. 10:505–39
     [Google Scholar]
  157. Martin I, Papadimitriou D. 2019. Sentiment and speculation in a market with heterogeneous beliefs CEPR Discuss. Pap. DP13857 Cent. Econ. Policy Res. London:
  158. Maxted P. 2020. A macro-finance model with sentiment Work. Pap. Harvard Univ. Cambridge, MA:
  159. Mian A, Rao K, Sufi A. 2013. Household balance sheets, consumption, and the economic slump. Q. J. Econ. 128:1687–726
     [Google Scholar]
  160. Mian A, Sufi A. 2014. What explains the 2007–2009 drop in employment?. Econometrica 82:2197–223
     [Google Scholar]
  161. Mian A, Sufi A. 2021. Credit supply and housing speculation. Rev. Financ. Stud. In press https://doi.org/10.1093/rfs/hhab034
     [Crossref] [Google Scholar]
  162. Milgrom P, Stokey N. 1982. Information, trade and common knowledge. J. Econ. Theory 26:17–27
     [Google Scholar]
  163. Miller EM. 1977. Risk, uncertainty, and divergence of opinion. J. Finance 32:1151–68
     [Google Scholar]
  164. Minsky HP. 1977. The financial instability hypothesis: an interpretation of Keynes and an alternative to standard theory. Challenge 20:20–27
     [Google Scholar]
  165. Mongin P. 2016. Spurious unanimity and the Pareto principle. Econ. Philos. 32:511–32
     [Google Scholar]
  166. Morck R, Shleifer A, Vishny RW. 1990. The stock market and investment: Is the market a sideshow?. Brook. Pap. Econ. Act. 2:157–215
     [Google Scholar]
  167. Morris S. 1995. The common prior assumption in economic theory. Econ. Philos. 11:227–53
     [Google Scholar]
  168. Morris S. 1996. Speculative investor behavior and learning. Q. J. Econ. 111:1111–33
     [Google Scholar]
  169. Nagel S. 2005. Short sales, institutional investors and the cross-section of stock returns. J. Financ. Econ. 78:277–309
     [Google Scholar]
  170. Nathanson CG, Zwick E. 2018. Arrested development: theory and evidence of supply-side speculation in the housing market. J. Finance 73:2587–633
     [Google Scholar]
  171. Odean T. 1998. Volume, volatility, price, and profit when all traders are above average. J. Finance 53:1887–934
     [Google Scholar]
  172. Ofek E, Richardson M. 2003. Dotcom mania: the rise and fall of internet stock prices. J. Finance 58:1113–37
     [Google Scholar]
  173. Panageas S. 2005. The neoclassical theory of investment in speculative markets Unpublished manuscript Univ. Calif. Los Angeles:
  174. Pflueger C, Siriwardane E, Sunderam A. 2020. Financial market risk perceptions and the macroeconomy. Q. J. Econ. 135:1443–91
     [Google Scholar]
  175. Phelan G, Toda AA. 2019. Securitized markets, international capital flows, and global welfare. J. Financ. Econ. 131:571–92
     [Google Scholar]
  176. Piazzesi M, Schneider M. 2009. Momentum traders in the housing market: survey evidence and a search model. Am. Econ. Rev. 99:406–11
     [Google Scholar]
  177. Polk C, Sapienza P. 2008. The stock market and corporate investment: a test of catering theory. Rev. Financ. Stud. 22:187–217
     [Google Scholar]
  178. Posner EA, Weyl EG. 2013. An FDA for financial innovation: applying the insurable interest doctrine to twenty-first-century financial markets. Northwest. Univ. Law Rev. 107:1307–57
     [Google Scholar]
  179. Reed AV. 2013. Short selling. Annu. Rev. Financ. Econ. 5:245–58
     [Google Scholar]
  180. Reinhart CM, Rogoff KS. 2009. This Time Is Different: Eight Centuries of Financial Folly Princeton, NJ: Princeton Univ. Press
  181. Rognlie M, Shleifer A, Simsek A. 2018. Investment hangover and the Great Recession. Am. Econ. J. Macroecon. 10:113–53
     [Google Scholar]
  182. Samuelson PA. 1958. An exact consumption-loan model of interest with or without the social contrivance of money. J. Political Econ. 66:467–82
     [Google Scholar]
  183. Sandroni A. 2000. Do markets favor agents able to make accurate predictions?. Econometrica 68:1303–41
     [Google Scholar]
  184. Santos MS, Woodford M. 1997. Rational asset pricing bubbles. Econometrica 65:19–57
     [Google Scholar]
  185. Scheinkman JA, Xiong W. 2003. Overconfidence and speculative bubbles. J. Political Econ. 111:1183–220
     [Google Scholar]
  186. Sebenius JK, Geanakoplos J. 1983. Don't bet on it: contingent agreements with asymmetric information. J. Am. Stat. Assoc. 78:424–26
     [Google Scholar]
  187. Shiller RJ. 2014. Speculative asset prices. Am. Econ. Rev. 104:1486–517
     [Google Scholar]
  188. Shiller RJ. 2015. Irrational Exuberance Princeton, NJ: Princeton Univ. Press. , 3rd ed..
  189. Shleifer A, Vishny RW. 1992. Liquidation values and debt capacity: a market equilibrium approach. J. Finance 47:1343–66
     [Google Scholar]
  190. Shleifer A, Vishny RW. 1997. The limits of arbitrage. J. Finance 52:35–55
     [Google Scholar]
  191. Simsek A. 2010. Essays on uncertainty in economics. PhD Thesis Mass. Inst. Technol. Cambridge:
     [Google Scholar]
  192. Simsek A. 2013a. Belief disagreements and collateral constraints. Econometrica 81:1–53
     [Google Scholar]
  193. Simsek A. 2013b. Speculation and risk sharing with new financial assets. Q. J. Econ. 128:1365–96
     [Google Scholar]
  194. Starr RM. 1973. Optimal production and allocation under uncertainty. Q. J. Econ. 87:81–95
     [Google Scholar]
  195. Stein JC. 1996. Rational capital budgeting in an irrational world. J. Bus. 69:429–55
     [Google Scholar]
  196. Stein JC. 2013. Overheating in credit markets: origins, measurement, and policy responses. Speech given at the symposium on Restoring Household Financial Stability After the Great Recession, Fed. Reserve Bank St. Louis, MO, Febr:7
     [Google Scholar]
  197. Svensson LE. 2017. Cost-benefit analysis of leaning against the wind. J. Monet. Econ. 90:193–213
     [Google Scholar]
  198. Tirole J. 1985. Asset bubbles and overlapping generations. Econometrica 53:1499–528
     [Google Scholar]
  199. Weyl EG. 2007. Is arbitrage socially beneficial?. Unpublished manuscript Microsoft Hoboken, NJ:
  200. Woodford M. 2012. Inflation targeting and financial stability NBER Work Pap. 17967
  201. Xiong W 2013. Bubbles, crises, and heterogeneous beliefs. Handbook for Systemic Risk J-P Fouque, J Langsam 663–713 Cambridge, UK: Cambridge Univ. Press
     [Google Scholar]
  202. Xiong W, Yan H 2010. Heterogeneous expectations and bond markets. Rev. Financ. Stud. 23:1433–66
     [Google Scholar]
  203. Xiong W, Yu J 2011. The Chinese warrants bubble. Am. Econ. Rev. 101:2723–53
     [Google Scholar]
  204. Xu Z, Dang TV. 2018. Market sentiment and innovation activities. J. Financ. Quant. Anal. 53:1135–61
     [Google Scholar]
  205. Yan H. 2008. Natural selection in financial markets: Does it work?. Manag. Sci. 54:1935–50
     [Google Scholar]
  206. Yu J. 2011. Disagreement and return predictability of stock portfolios. J. Financ. Econ. 99:162–83
     [Google Scholar]
  207. Zapatero F. 1998. Effects of financial innovations on market volatility when beliefs are heterogeneous. J. Econ. Dyn. Control 22:597–626
     [Google Scholar]
/content/journals/10.1146/annurev-economics-092120-050543
Loading

Supplemental Material

Supplementary Data

  • Article Type: Review Article

Most Cited Most Cited RSS feed

This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error