Stock price bubbles, leverage and systemic risk

Using on a broad quarterly dataset of 25 developing and developed countries from 1975 to 2017, this paper empirically studies the impact of stock price bubbles on systemic risk and its transmission channel. Results from panel regressions and the Qual VAR model demonstrate that stock market exuberanc...

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Bibliographic Details
Published in:International review of economics & finance 2021-07, Vol.74, p.405-417
Main Authors: Chen, Guojin, Chen, Lingling, Liu, Yanzhen, Qu, Yuxuan
Format: Article
Language:English
Subjects:
Boom-bust cycle
Credit
Stock price bubbles
Systemic risk
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Summary:Using on a broad quarterly dataset of 25 developing and developed countries from 1975 to 2017, this paper empirically studies the impact of stock price bubbles on systemic risk and its transmission channel. Results from panel regressions and the Qual VAR model demonstrate that stock market exuberance is a prominent contributor of financial fragility, and credit-price feedback is the key transmission channel. It’s worth noting that systemic risk has already increased while the bubble is building up, and the stock bubble boom-bust cycle exhibits notably asymmetric influence on systemic risk with a larger risk increase during the bubble bust. We also find that the risk exposure induced by stock price bubbles is higher for countries with more developed stock markets and for periods when the economy is prospering.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2021.03.017