Download e-book for iPad: Bubbles and Contagion in Financial Markets, Volume 1: An by E. Porras

By E. Porras

Asset bubbles and contagion have had a profound impact at the monetary markets after the monetary and sovereign debt crises. This booklet takes a quantitative method of reading those phenomena and may entice practitioners who have to comprehend the repercussions of those occasions on buying and selling exchanges and the markets.

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Additional info for Bubbles and Contagion in Financial Markets, Volume 1: An Integrative View

Sample text

Later that month, the rate was cut by another half point. 75 percent. With the recession over and mortgage rates at 40-year lows, the housing sector began to soar. 38 However, even with all this activity, employment in other sectors remained undersized. Thus, the Fed persevered in using monetary policy as worries of a “jobless recovery” (an increase in production with no marginal gain in employment) began to surface. 3 percent just three years earlier. 39 Given that interest rates for the typical 30-year fixed-rate mortgage are historically related to the overnight federal funds’ rate, low rates cut the cost of home ownership.

E. Bubbles result in a post-implosion balance sheet induced recession. After the bursting of a bubble, the affected assets will be revalued at their new, lower level, while the value of the liabilities will not change. Thus, from that time on, the corporations’ main objective is to reduce debt rather than to maximize revenue. At the aggregate level, during the deleverage process, no one will borrow money independently of the interest rate. Consequently, money going into the local banking system cannot revert to the local economy.

Hence, flows such as those resulting from the increased saving rates in China, oil-producing countries, and other big developing nations which make their way to the USA and Europe have also contributed to the decrease in interest rates.

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