Title: Stock market bubbles and business cycles
Language: English
Authors: Koll, David 
Qualification level: Diploma
Advisor: Reiter, Michael
Issue Date: 2013
Number of Pages: 69
Qualification level: Diploma
Stock markets are relatively volatile compared to macroeconomic variables such as GDP and consumption. It seems that uctuations in wealth - implied by booms in the stock markets - induces subsequent changes in macroeconomic aggregates. This thesis provides a reduced form of a real business cycle model with stock market bubbles presented in Miao et al. (2012) that creates this phenomenon. The main mechanism is that higher asset prices can be pledged as collateral in an endogenous credit constraint. Firms' stock market values may contain a bubble component which emerges with an exogenous probability at the firm's entry. In equilibrium, bubbles are sustained by self-fulfilling beliefs because a higher stock market value relaxes the credit constraint. The resulting higher investment implies higher future dividends which rationalizes the higher price today. Firms investment decision depends on an idiosyncratic investment efficiency shock. If no agents belief in the existence of a bubble, the equilibrium of the economy cannot contain a bubble. Hence, under some parameter restrictions the model has multiple equilibria implied by different expectations. The beliefs of agents about future aggregate bubbles in the economy are modeled by a sentiment shock that drives the size of the bubbles which creates real effects through the collateral constraint. But note that this shock cannot bring the economy from one equilibrium to the other. I show that the firm specific bubble component is equal to the sum of expected future dividends arising from the relaxations of the credit constraint in the future due to the bubble. I prove that the Bellman operator given by the firm's decision problem does not give a contraction. Furthermore, I detect a problem in the timing structure of the model. This has the implication that investment is not financed by external borrowing as assumed by Miao et al., but by new externally raised equity, i.e. negative dividends. Thus, the endogenous credit constraint is effectively restricting the amount of equity the firm can raise.
URI: https://resolver.obvsg.at/urn:nbn:at:at-ubtuw:1-76564
Library ID: AC10895537
Organisation: E017 - Weiterbildungszentrum der TU Wien 
Publication Type: Thesis
Appears in Collections:Thesis

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