August 2018
[Finance] Hassan Naqvi - On Reaching for Yield and the Coexistence of Bubbles and Negative Bubbles
by Naqvi Hassan
Abstract
We develop a model of financial intermediation wherein bank managers "reach for yield" - by over investing in risky assets and under investing in safer assets - provided they do not face much cost from liquidity shortfalls. The managers follow a pecking order in which their last 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.
bubbles, monetary policy, moral hazard, negative bubbles, reaching for yield, risk-taking channel
Naqvi Hassan
Associate Professor / Economics / Finance