Do Asset Price Bubbles have Negative Real Effects?

55 Pages Posted: 2 Apr 2013

See all articles by Indraneel Chakraborty

Indraneel Chakraborty

University of Miami

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Andrew MacKinlay

Virginia Tech

Date Written: April 2, 2013

Abstract

In the recent recession and current economic recovery, policymakers have supported asset prices in the U.S. treasury and mortgage markets, expecting that improvement in the balance sheet of banks will lead to more commercial lending. In general, we document that increases in housing prices in a bank’s deposit base lead banks to decrease commercial lending. Further, we find that a one-standard deviation increase in housing prices is associated with a 10.3 percentage point decrease in investment of borrowing firms and a 4.2 percentage point decrease in leverage. These results suggest that when asset prices increase in one sector (such as the housing market), banks may respond by reallocating capital away from other sectors (such as commercial lending) towards the supported sectors.

Keywords: Bank Loans, Housing Shocks, Investment Policy, Leverage

JEL Classification: G21, G31, G32

Suggested Citation

Chakraborty, Indraneel and Goldstein, Itay and MacKinlay, Andrew, Do Asset Price Bubbles have Negative Real Effects? (April 2, 2013). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, University of Miami Business School Research Paper No. 3676682, Available at SSRN: https://ssrn.com/abstract=3676682 or http://dx.doi.org/10.2139/ssrn.3676682

Indraneel Chakraborty

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
312-208-1283 (Phone)

HOME PAGE: http://sites.google.com/site/chakraborty/

Itay Goldstein (Contact Author)

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Andrew MacKinlay

Virginia Tech ( email )

1016 Pamplin Hall (0221)
880 West Campus Drive
Blacksburg, VA 24060-0221
United States

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