Heterogeneous Global Booms and Busts

Booms, Busts, and Divorce.

For almost a century, anecdotes have suggested that divorce rates decline during recessions. However, until very recently there has been surprisingly little formal empirical evidence on whether such a link exists, let alone its magnitude if it does. Moreover, the anticipated direction of the effect is ambiguous theoretically. Although previous studies have concluded that individual job loss des...

Real and Financial Industry Booms and Busts

We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. Our results show how real and financial factors interact in industry business cycles. In competitive industries, we find that high industry-level stock market valuation, investment, and financing are followed by sharply lower operating cash flows and abnormal stock returns. Analyst e...

Booms and Busts in Asset Prices

We show how low-frequency boom and bust cycles in asset prices can emerge from Bayesian learning by investors. Investors rationally maximize infinite horizon utility but hold subjective priors about the asset return process that we allow to differ infinitesimally from the rational expectations prior. Bayesian updating of return beliefs then gives rise to self-reinforcing return optimism that re...

Booms and Busts, Bubbles and Crashes

Understanding Booms and Busts in Housing Markets∗

Some booms in housing prices are followed by busts. Others are not. It is generally diffi cult to find observable fundamentals that are useful for predicting whether a boom will turn into a bust or not. We develop a model consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of “social dynamics.”Agents with tighter ...