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Stock price bubbles, leverage and systemic risk

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  • Chen, Guojin
  • Chen, Lingling
  • Liu, Yanzhen
  • Qu, Yuxuan

Abstract

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.

Suggested Citation

  • Chen, Guojin & Chen, Lingling & Liu, Yanzhen & Qu, Yuxuan, 2021. "Stock price bubbles, leverage and systemic risk," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 405-417.
    • Handle: RePEc:eee:reveco:v:74:y:2021:i:c:p:405-417
    DOI: 10.1016/j.iref.2021.03.017
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    Cited by:

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    2. Yang, Hui & Ferrer, Román, 2023. "Explosive behavior in the Chinese stock market: A sectoral analysis," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).

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    More about this item

    Keywords

    Stock price bubbles; Systemic risk; Credit; Boom-bust cycle;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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