Working Paper: CEPR ID: DP10148
Authors: Tobias Broer; Afroditi Kero
Abstract: Survey respondents strongly disagree about return risks and, increasingly, macroeconomic uncertainty. This may have contributed to higher asset prices through increased use of collateralisation, which allows risk-neutral investors to realise perceived gains from trade. Investors with lower risk perceptions buy collateralised loans, whose downside-risk they perceive as small. Investors with higher risk perceptions buy upside-risk through asset purchase and collateralised loan issuance, raising prices. More complex collateralised contracts, like CDOs, can increase prices further. In contrast, with disagreement about mean payoffs, price bubbles arise without collateralisation, which may discipline prices as pessimists demand higher returns on risky loans.
Keywords: Asset Prices; Bubbles; Disagreement; Heterogeneous Beliefs; Volatility
JEL Codes: D82; D83; E32; E44; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| disagreement among investors about return risks and macroeconomic uncertainty (D81) | higher asset prices (G19) |
| increased use of collateralisation (F65) | higher asset prices (G19) |
| risk-neutral investors leverage collateralised loans (G19) | raise prices (D49) |
| lower risk perceptions (D81) | increase demand for collateralised loans (G21) |
| higher risk perceptions (D81) | buy upside risk (G13) |
| introduction of complex collateralised contracts (CDOs) (F65) | inflated asset prices (E31) |
| absence of collateralisation (G33) | return to common fundamental values (D46) |
| interaction between collateralisation and heterogeneous risk perceptions (D81) | emergence and persistence of asset price bubbles (E32) |
| increased belief dispersion (D80) | raised asset prices (G19) |