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Deleveraging Episodes and Stock Market Booms: An empirical analysis

11 May 2016 at 12:00 PM - 1:30 PM

Room 104, Campus on Viale Romania, 32

Speaker: Rovo Natasha, LUISS
  • Title: Deleveraging Episodes and Stock Market Booms: An empirical analysis
  • Abstract: Most of the empirical works on stock market booms and bubbles focus on the growing phase and the burst. Recent works by Jordà et al. (2015) and Brunnermeier and Schnabel (2015) document the disruptive effects of leveraged bubbles both for financial stability and for the real economy. Why bubbles start remains unclear. The final objective of this project is to fill the gap. I adopt a cross country analysis and I show that deleveraging episodes may predict stock market booms within the following three years. Therefore I regress the 3-years forward average growth rate of the stock price index over GDP ratio against the change in debt-to-GDP ratio during the preceding deleveraging episode. I find that the regression coefficient is negative and statistically significant.