Asset Bubbles: Re-thinking Policy for the Age of Asset Management

February 11, 2015

Preview Citation

Format: Chicago

Bradley Jones. Asset Bubbles: Re-thinking Policy for the Age of Asset Management, (USA: International Monetary Fund, 2015) accessed September 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

In distilling a vast literature spanning the rational— irrational divide, this paper offers reflections on why asset bubbles continue to threaten economic stability despite financial markets becoming more informationally-efficient, more complete, and more heavily influenced by sophisticated (i.e. presumably rational) institutional investors. Candidate explanations for bubble persistence—such as limits to learning, frictional limits to arbitrage, and behavioral errors—seem unsatisfactory as they are inconsistent with the aforementioned trends impacting global capital markets. In lieu of the short-term nature of the asset owner—manager relationship, and the momentum bias inherent in financial benchmarks, I argue that the business risk of asset managers acts as strong motivation for institutional herding and ‘rational bubble-riding.’ Two key policy implications follow. First, procyclicality could intensify as institutional assets under management continue to grow. Second, remedial policies should extend beyond the standard suite of macroprudential and monetary measures to include time-invariant policies targeted at the cause (not just symptom) of the problem. Prominent among these should be reforms addressing principal-agent contract design and the implementation of financial benchmarks.

Subject: Asset and liability management, Asset bubbles, Asset management, Asset prices, Financial crises, Financial markets, Financial sector policy and analysis, Financial sector stability, Prices, Stock markets

Keywords: Asset boom, Asset bubble, Asset bubble model, Asset bubbles, Asset management, Asset market, Asset price, Asset price determination, Asset price increase, Asset price inflation, Asset price movement, Asset prices, Bubble model, Cost of capital, Drive asset price, Earnings yield, Financial sector stability, Financial stability, Global, Macroprudential policy, Market capitalization, Monetary policy, Stock markets, Valuation misalignment, WP

Publication Details

Pages:

59
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/027
Stock No:

WPIEA2015027
ISBN:

9781475576207
ISSN:

1018-5941

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