On reaching for yield and the coexistence of bubbles and negative bubbles

Viral Acharya, Hassan Naqvi

Research output: Contribution to journalArticleResearchpeer-review

6 Citations (Scopus)

Abstract

We develop a model of financial intermediation wherein bank managers “reach for yield” – by overinvesting in risky assets and underinvesting in safer assets – provided they do not face much cost from liquidity shortfalls. The managers follow a pecking order in which their first preference is to invest in risky assets; their second preference is to hoard liquid assets; and their last preference is to invest in safer assets. This behavior is conducive to the formation of bubbles and “negative” bubbles in the market for risky and safer assets, respectively. Monetary loosening, by reducing the cost of liquidity shortfalls, induces further reach for yield and amplifies the bubbles.

Original languageEnglish
Pages (from-to)1-10
Number of pages10
JournalJournal of Financial Intermediation
Volume38
DOIs
Publication statusPublished - Apr 2019

Keywords

  • Bubbles
  • Monetary policy
  • Moral hazard
  • Negative bubbles
  • Reaching for yield
  • Risk-taking channel

Cite this