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...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2014
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| 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 |
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okr-10986-194412021-04-23T14:03:43Z Tropical Bubbles : Asset Prices in Latin America, 1980-2001 Herrera, Santiago Perry, Guillermo AGGREGATE DEMAND ASSET PRICE BUBBLES ASSET PRICES ASSET PRICING AUTOREGRESSION BANK LENDING BANKING CRISES BANKING SYSTEMS BENCHMARK BONDS CAPITAL FLOWS CD CENTRAL BANK CPI DEBT DEVALUATION DISCOUNTED VALUE DIVIDENDS ECONOMIC ACTIVITY ECONOMIC OUTLOOK EMERGING MARKETS EQUILIBRIUM EQUITY MARKETS EXCHANGE RATE EXCHANGE RATES EXPECTED RETURNS EXPECTED VALUES FINANCIAL SECTOR GDP GROWTH RATE INFLATION INTEREST RATES MARKET ECONOMIES MARKET PRICES MONETARY POLICY MONEY SUPPLY OVERVALUATION PERFECT INFORMATION PRESENT VALUE PRICE INDEX PRICE INDEXES PRICE VOLATILITY PRICING MODELS REAL INTEREST RATE REAL RATE OF INTEREST SECURITIES SPREAD STATISTICAL ANALYSIS STOCK MARKETS STOCK PRICES STOCKS STRUCTURAL CHANGE TERMS OF TRADE TRADE SHOCKS TREASURY BILLS TROUGH TRUSTS UNDERESTIMATES VOLATILITY 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. 2014-08-19T18:25:15Z 2014-08-19T18:25:15Z 2001-11 http://documents.worldbank.org/curated/en/2001/11/1643370/tropical-bubbles-asset-prices-latin-america-1980-2001 http://hdl.handle.net/10986/19441 English en_US Policy Research Working Paper;No. 2724 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
AGGREGATE DEMAND ASSET PRICE BUBBLES ASSET PRICES ASSET PRICING AUTOREGRESSION BANK LENDING BANKING CRISES BANKING SYSTEMS BENCHMARK BONDS CAPITAL FLOWS CD CENTRAL BANK CPI DEBT DEVALUATION DISCOUNTED VALUE DIVIDENDS ECONOMIC ACTIVITY ECONOMIC OUTLOOK EMERGING MARKETS EQUILIBRIUM EQUITY MARKETS EXCHANGE RATE EXCHANGE RATES EXPECTED RETURNS EXPECTED VALUES FINANCIAL SECTOR GDP GROWTH RATE INFLATION INTEREST RATES MARKET ECONOMIES MARKET PRICES MONETARY POLICY MONEY SUPPLY OVERVALUATION PERFECT INFORMATION PRESENT VALUE PRICE INDEX PRICE INDEXES PRICE VOLATILITY PRICING MODELS REAL INTEREST RATE REAL RATE OF INTEREST SECURITIES SPREAD STATISTICAL ANALYSIS STOCK MARKETS STOCK PRICES STOCKS STRUCTURAL CHANGE TERMS OF TRADE TRADE SHOCKS TREASURY BILLS TROUGH TRUSTS UNDERESTIMATES VOLATILITY |
| spellingShingle |
AGGREGATE DEMAND ASSET PRICE BUBBLES ASSET PRICES ASSET PRICING AUTOREGRESSION BANK LENDING BANKING CRISES BANKING SYSTEMS BENCHMARK BONDS CAPITAL FLOWS CD CENTRAL BANK CPI DEBT DEVALUATION DISCOUNTED VALUE DIVIDENDS ECONOMIC ACTIVITY ECONOMIC OUTLOOK EMERGING MARKETS EQUILIBRIUM EQUITY MARKETS EXCHANGE RATE EXCHANGE RATES EXPECTED RETURNS EXPECTED VALUES FINANCIAL SECTOR GDP GROWTH RATE INFLATION INTEREST RATES MARKET ECONOMIES MARKET PRICES MONETARY POLICY MONEY SUPPLY OVERVALUATION PERFECT INFORMATION PRESENT VALUE PRICE INDEX PRICE INDEXES PRICE VOLATILITY PRICING MODELS REAL INTEREST RATE REAL RATE OF INTEREST SECURITIES SPREAD STATISTICAL ANALYSIS STOCK MARKETS STOCK PRICES STOCKS STRUCTURAL CHANGE TERMS OF TRADE TRADE SHOCKS TREASURY BILLS TROUGH TRUSTS UNDERESTIMATES VOLATILITY Herrera, Santiago Perry, Guillermo Tropical Bubbles : Asset Prices in Latin America, 1980-2001 |
| relation |
Policy Research Working Paper;No. 2724 |
| description |
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. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Herrera, Santiago Perry, Guillermo |
| author_facet |
Herrera, Santiago Perry, Guillermo |
| author_sort |
Herrera, Santiago |
| title |
Tropical Bubbles : Asset Prices in Latin America, 1980-2001 |
| title_short |
Tropical Bubbles : Asset Prices in Latin America, 1980-2001 |
| title_full |
Tropical Bubbles : Asset Prices in Latin America, 1980-2001 |
| title_fullStr |
Tropical Bubbles : Asset Prices in Latin America, 1980-2001 |
| title_full_unstemmed |
Tropical Bubbles : Asset Prices in Latin America, 1980-2001 |
| title_sort |
tropical bubbles : asset prices in latin america, 1980-2001 |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://documents.worldbank.org/curated/en/2001/11/1643370/tropical-bubbles-asset-prices-latin-america-1980-2001 http://hdl.handle.net/10986/19441 |
| _version_ |
1764439870310187008 |