Tropical Bubbles : Asset Prices in Latin America, 1980-2001
The authors test for the existence of asset price bubbles in Latin America in 1980-2001, focusing mainly on stock prices. Based on unit root and cointegration tests, they find that they cannot reject the hypothesis of bubbles. They arrive at the sa...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/11/1643370/tropical-bubbles-asset-prices-latin-america-1980-2001 http://hdl.handle.net/10986/19441 |
| Summary: | The authors test for the existence of
asset price bubbles in Latin America in 1980-2001, focusing
mainly on stock prices. Based on unit root and cointegration
tests, they find that they cannot reject the hypothesis of
bubbles. They arrive at the same conclusion using Froot and
Obstfeld's intrinsic bubbles model. To examine
empirical regularities of these bubble episodes in the
region, the authors identify periods of significant stock
price overvaluation. They quantify the relative importance
of different factors that determine the probability of
bubble occurrence, focusing on the contrast between the
country-specific variables and the common external factors.
They include as country-specific variables both the level
and the volatility of domestic credit growth, the volatility
of asset returns, the capital flows to each country, and the
terms of trade. As common external variables, they consider
the degree of asset overvaluation in the U.S. stock and real
estate markets and the term spread of U.S. Treasury
securities. To quantitatively assess the relative importance
of each factor, they estimate a logit model for a panel of
five Latin American countries from 1985 to 2001. In general,
the authors find that the marginal probabilities of common
and country-specific variables are of roughly the same order
of magnitude. This finding contrasts with those of previous
studies that real asset returns in Latin America are
dominated by local factors. Finally, the authors explore the
main channels through which asset prices affect real
economic activity, with the most important being the balance
sheet effect and its impact on bank lending. They show how
the allocation of bank lending across different sectors
responded sensitively to real estate prices during the boom
years in countries that experienced banking crises. Thus
asset price bubbles have long-lasting effects in the
financial sector and, through this channel, on growth.
Another channel through which asset prices-particularly
stock market prices-affect long-run growth is through their
effect on investment. The authors find a strong positive
association between stock prices and investment and a
negative effect of stock price volatility on investment. An
additional motive for the central bank to monitor asset
prices is the general coincidence of the crash episodes
identified by the authors with currency crises in the region
in the past two decades. |
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