{ "title": "Asset Bubbles: Re-thinking Policy for the Age of Asset Management", "publication": "IMF Working Papers, February 11, 2015", "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/asset-bubbles-re-thinking-policy-for-the-age-of-asset-management-42700", "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/31/asset-bubbles-re-thinking-policy-for-the-age-of-asset-management-42700", "overlayPath": "/en/publications/wp/issues/2016/12/31/asset-bubbles-re-thinking-policy-for-the-age-of-asset-management-42700/index.md", "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.", "sections": [ { "heading": "Summary", "content": "- The paper synthesizes a broad literature across the rational—irrational divide to explain why asset bubbles continue to threaten economic stability despite markets becoming more informationally-efficient, more complete, and more heavily influenced by sophisticated (i.e. presumably rational) institutional investors.\n- Candidate explanations for bubble persistence examined include limits to learning, frictional limits to arbitrage, and behavioral errors; these are judged unsatisfactory because they conflict with the trends affecting global capital markets described above.\n- The author emphasizes the short-term nature of the asset owner—manager relationship and the momentum bias inherent in financial benchmarks as critical factors shaping asset manager behavior.\n- The central argument: the business risk of asset managers provides strong motivation for institutional herding and what the author terms “rational bubble-riding.”" }, { "heading": "Key Findings", "content": "- Institutional herding and rational bubble-riding are driven by the business risk faced by asset managers linked to principal-agent dynamics and benchmark-related incentives.\n- Traditional explanations (limits to learning, frictional limits to arbitrage, behavioral errors) are inconsistent with increased market informational efficiency, market completeness, and greater influence of institutional investors.\n- Procyclicality may intensify as institutional assets under management continue to grow." }, { "heading": "Policy Implications and Recommendations", "content": "- Remedial policies should extend beyond standard macroprudential and monetary measures to include time-invariant policies targeted at the root causes rather than only the symptoms of asset bubbles.\n- Prominent policy reforms recommended:\n - Reforms addressing principal-agent contract design.\n - Reforms related to the implementation of financial benchmarks.\n- Anticipated policy consequence: without addressing contract design and benchmark implementation, the growth of institutional assets under management could amplify procyclicality." }, { "heading": "Subject Coverage and Keywords", "content": "- 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.\n- Keywords include: asset boom; asset bubble; asset bubble model; Asset management; asset market; asset price; asset price determination; asset price inflation; asset price movement; Asset prices; bubble model; cost of capital; earnings yield; Financial sector stability; Financial stability; Global; Macroprudential policy; market capitalization; monetary policy; Stock markets; valuation misalignment; WP.\n\n---\n\n Content in this bundle\n\n- wp1527\n - wp1527 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - wp1527 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/asset-bubbles-re-thinking-policy-for-the-age-of-asset-management-42700" } ], "bullets": [ "[Markdown version](/en/publications/wp/issues/2016/12/31/asset-bubbles-re-thinking-policy-for-the-age-of-asset-management-42700/index.md)", "[Structured JSON version](/en/publications/wp/issues/2016/12/31/asset-bubbles-re-thinking-policy-for-the-age-of-asset-management-42700/index.json)", "[Bundle manifest](/en/publications/wp/issues/2016/12/31/asset-bubbles-re-thinking-policy-for-the-age-of-asset-management-42700/bundle-manifest.json)", "Authors: Bradley Jones", "Published: February 11, 2015", "Series: IMF Working Papers", "DOI: https://doi.org/10.5089/9781475576207.001", "The paper synthesizes a broad literature across the rational—irrational divide to explain why asset bubbles continue to threaten economic stability despite markets becoming more informationally-efficient, more complete, and more heavily influenced by sophisticated (i.e. presumably rational) institutional investors.", "Candidate explanations for bubble persistence examined include limits to learning, frictional limits to arbitrage, and behavioral errors; these are judged unsatisfactory because they conflict with the trends affecting global capital markets described above.", "The author emphasizes the short-term nature of the asset owner—manager relationship and the momentum bias inherent in financial benchmarks as critical factors shaping asset manager behavior.", "The central argument: the business risk of asset managers provides strong motivation for institutional herding and what the author terms “rational bubble-riding.”", "Institutional herding and rational bubble-riding are driven by the business risk faced by asset managers linked to principal-agent dynamics and benchmark-related incentives.", "Traditional explanations (limits to learning, frictional limits to arbitrage, behavioral errors) are inconsistent with increased market informational efficiency, market completeness, and greater influence of institutional investors.", "Procyclicality may intensify as institutional assets under management continue to grow.", "Remedial policies should extend beyond standard macroprudential and monetary measures to include time-invariant policies targeted at the root causes rather than only the symptoms of asset bubbles.", "Prominent policy reforms recommended:", "Anticipated policy consequence: without addressing contract design and benchmark implementation, the growth of institutional assets under management could amplify procyclicality.", "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 include: asset boom; asset bubble; asset bubble model; Asset management; asset market; asset price; asset price determination; asset price inflation; asset price movement; Asset prices; bubble model; cost of capital; earnings yield; Financial sector stability; Financial stability; Global; Macroprudential policy; market capitalization; monetary policy; Stock markets; valuation misalignment; WP.", "**_wp1527**" ], "related": [ { "title": "_wp1527", "role": "document", "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1527.pdf", "summary": { "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1527.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1527.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/publications/wp/issues/2016/12/31/asset-bubbles-re-thinking-policy-for-the-age-of-asset-management-42700/index.md", "json": "/en/publications/wp/issues/2016/12/31/asset-bubbles-re-thinking-policy-for-the-age-of-asset-management-42700/index.json", "bundleManifest": "/en/publications/wp/issues/2016/12/31/asset-bubbles-re-thinking-policy-for-the-age-of-asset-management-42700/bundle-manifest.json" }, "generatedAtUtc": "2026-09-17T09:32:19.815Z" }