Can Miracles Lead to Crises?: The Role of Optimism in Emerging Markets Crises

Emerging market financial crises are abrupt and dramatic, usually occurring after a period of high output growth, massive capital flows, and a boom in asset markets. This paper develops an equilibrium asset-pricing model with informational frictions in which vulnerability and the crisis itself are c...

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Bibliographic Details
Main Author: Boz, Emine (Author)
Format: Electronic eBook
Language:English
Published: Washington, D.C International Monetary Fund 2007
Series:IMF Working Papers Working Paper No. 07/223
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Summary:Emerging market financial crises are abrupt and dramatic, usually occurring after a period of high output growth, massive capital flows, and a boom in asset markets. This paper develops an equilibrium asset-pricing model with informational frictions in which vulnerability and the crisis itself are consequences of the investor optimism in the period preceding the crisis. The model features two sets of investors, domestic and foreign. Both sets of investors learn from noisy signals, which contain information relevant for asset returns and formulate expectations, or ""beliefs,"" about the state of productivity. We show that, if preceded by a sequence of positive signals, a small, negative noise shock can trigger a sharp downward adjustment in investors'' beliefs, asset prices, and consumption. The magnitude of this downward adjustment and sensitivity to negative signals increase with the level of optimism attained prior to the negative signal
Physical Description:1 Online-Ressource (34 p)
ISBN:1451867875
9781451867879

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