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The Hazards of Propping Up: Bubbles and Chaos

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  • Philip Maymin

Abstract

In the current environment of financial distress, many governments are likely to soon become major holders of financial assets, but the policy debate focuses only on the likelihood and extent of short-term market stabilization. This paper shows that government intervention and propping up are likely to lead to long-term bubbles and even wildly chaotic behavior. The discontinuities occur when the committed capital reaches a critical amount that depends on just two parameters: the market impact of trading and the target exposure percentage.

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  • Philip Maymin, 2010. "The Hazards of Propping Up: Bubbles and Chaos," Papers 1002.2282, arXiv.org.
    • Handle: RePEc:arx:papers:1002.2282
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    References listed on IDEAS

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    1. Robert A. Jarrow, 2008. "Market Manipulation, Bubbles, Corners, and Short Squeezes," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 6, pages 105-130, World Scientific Publishing Co. Pte. Ltd..
    2. Philip Maymin, 2009. "The Hazards Of Propping Up: Bubbles And Chaos," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 3(2), pages 83-93.
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