Bust Periods Research Articles

Stock prices' interdependence during the South Sea boom and bust

AbstractThis paper empirically investigates interdependence between major companies' stock prices during the 1720 South Sea boom and bust. This was one of the first documented major financial crashes in the European market. Empirical tests are conducted by means of rolling coefficients, multivariate cointegration, rolling cointegration, and causality tests. Results indicate a substantial interdependence among the stock prices during the boom but not during the bust period. This result implies the failure of the efficient market hypothesis and the diminishing ability of the investors to reduce portfolio risk via diversification during the boom period. The causality test results provide ample evidence of short‐term interaction between shares during the period of increasing prices.

A note on the influence of saving behaviors on economic growth

AbstractThe Kaldor model describes the dynamics of economic growth over time. Many works showed that a large variety of qualitative dynamics can be produced depending on the economic assumptions. This work provides conditions to mark boundaries during boom and bust cycles, investigating how saving behaviors of workers and shareholders and elasticity of substitution between capital and labor influence the growth dynamics of non‐developed, developing and developed countries considering general and specific technologies of production. The results obtained can be used by policy‐makers to increase the lower level an economy can reach during boom and bust periods and reduce fluctuations.

Does Investor Sentiment Predict the Near‐Term Returns of the Chinese Stock Market?

AbstractRecent evidence on the relationship between investor sentiment and subsequent monthly market returns in China shows that investor sentiment is a reliable momentum predictor since an increase (decrease) in investor sentiment leads to higher (lower) future returns. However, we suggest that momentum predictability of investor sentiment originates from the boom and bust period of 2006–2008 (the bubble period hereafter). The bubble period is characterized by several months of sustained optimism followed by several months of sustained pessimism, with the market consequently earning high (low) returns following high (low) sentiment months. Therefore, we find a strong positive association between investor sentiment and subsequent market returns during the bubble period. However, investor sentiment has a negligible impact on subsequent monthly market returns once we exclude the bubble period.

Policy pathways to carbon entrenchment: responses to the climate crisis in Canada’s petro-provinces

This paper examines the diverse policy strategies that Canada’s largest oil-producing provinces have used to protect their oil sectors from constraints on emissions. Building from the literature on Canada’s staples/carbon trap, the paper explores how, over the most recent oil sector boom and bust period, Newfoundland and Labrador and Saskatchewan moved towards, but then avoided, constraining oil sector emissions. At the same time, Alberta implemented ostensibly pioneering climate policies but ultimately permitted significant emissions growth from the tar sands industry. The paper explains this variation by reviewing major institutional, interest group, and ideational conditions in each province, emphasizing the importance of non-oil interests contesting the oil sector and dominant notions of staples-led economic development.

Lending Standards over the Credit Cycle

We analyze how firms’ segmentation into credit classes affects the lending standards applied by banks to small and medium enterprises over the cycle. We exploit an institutional feature of the Italian credit market that generates a discontinuity in the allocation of comparable firms into the performing and substandard classes of credit risk. In the boom period, segmentation results in a positive interest rate spread between substandard and performing firms. In the bust period, the increase in banks’ cost of wholesale funds implies that substandard firms are excluded from credit. These firms then report lower values of production and capital investments. Received January 22, 2016; editorial decision December 18, 2017 by Editor Robin Greenwood. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

What can we learn about news shocks from the late 1990s and early 2000s boom-bust period?

The major boom-bust period of 1997–2003 is commonly viewed as an expectations-driven episode in which overly optimistic expectations about information and communications technology were followed by their downward revision. This paper employs a novel approach to identifying the news shocks of this period that restricts the identified shock to have its maximal three-year moving average of realizations in the 1997–1999 boom period, followed by a negative average in the bust period. I provide robust evidence that this shock raises output, hours, investment, and consumption, and accounts for the majority of their business cycle variation.

Coal and family through the boom and bust: A look at the coal Industry's impact on marriage and divorce

Rural America has a long relationship with the coal industry. Long-term shifts toward less labor intensive practices in the industry, coupled with policies aimed at reducing carbon emissions have resulted in substantial employment losses in coal communities. While the economic impacts of declining industries in rural America have been documented, less work has been done to investigate the impact of coal employment losses on social outcomes. We address this gap in the literature by assessing the association between county-level measures of coal employment and marriage, divorce, and cohabitation in nonmetro America. We use a novel proprietary data set to isolate the relationship between marital outcome and coal mining from all other types of mining that aggregated in publicly available data sets. Additionally, we compare these relationships across boom and bust periods. We find that after controlling for total employment growth, the presence of coal mining in a county is significantly associated with marital outcomes and these relationships differ across nonmetro and metro areas. We find some evidence that rural areas that typically have more experience with extraction industries display greater resilience to both positive and negative coal industry shocks compared to metropolitan counties.

Gentrification and the suburbanization of poverty: changing urban geographies through boom and bust periods

ABSTRACTMany postindustrial cities across Europe and other contexts are marked by growing social–spatial inequalities, housing liberalization, and gentrification, which limit the housing options of low-income households. We investigated changes in the residential moves of different low-income households (working poor, low-to-middle income, and unemployed) in the Amsterdam and Rotterdam urban regions for the time period 2004–2013. We found an overarching trend for the suburbanization of poverty toward the urban peripheries and surrounding regions. While this trend appears to be relatively crisis resistant in the tight Amsterdam housing context, it is more cyclical in Rotterdam and has slowed following the global financial crisis. Low-to-middle income and unemployed households are increasingly moving to the urban regions surrounding cities, particularly to higher density satellite towns. Nevertheless, a growing number of working poor households remain highly urbanized, employing various coping strategies to acquire housing. This paper reveals how the suburbanization of poverty is both a direct process of poor households moving from city to suburb, and a broader indirect process caused by exclusionary mechanisms such as the decreasing accessibility and affordability of inner-urban neighborhoods, which reflect broader changes in the geography and socioeconomic patterning of urban regions.

The Financial Crisis and Diverging House Prices: Evidence from the Copenhagen Metropolitan Area

This paper investigates the development of house prices in Copenhagen in the period 1994-2013, while paying special attention to the heterogeneous impact of the boom and bust periods along the dimensions of housing type (single vs multifamily housing), geography and quality. To allow for price developments that can differ by quality, we use a recently developed generalization of the conventional Muth model that assumes a constant unit price across the quality spectrum. It allows us to separately consider the development of house prices and quality in Copenhagen neighbourhoods. Moreover, we investigate the validity of the common assumption of a constant unit price and reject it decisively. We use detailed housing transaction data for the greater Copenhagen area. We show that the housing boom of the 2000’s and the bust that followed hit the lowest quality segments significantly harder than the high quality segments of the housing market.

Mortgage Supply and the US Housing Boom: The Role of the Community Reinvestment Act

This paper studies the role of the Community Reinvestment Act (CRA) in the recent US housing boom-bust cycle. Using a difference-in-differences matching estimation, I find that the enhancement of CRA enforcement in 1998 caused a 7.7 percentage points increase in annual growth rate of mortgage lending by CRA-regulated banks to CRA-eligible census tracts relative to a group of similar-income CRA-ineligible census tracts within the same state. Financial institutions which are not subject to the CRA, however, do not show any change in their mortgage supply between these two types of census tracts after 1998. I take advantage of this exogenous shift in mortgage supply within an instrumental variable framework to identify the causal effect of mortgage supply on housing prices. I find that every 1 percentage point higher annual growth rate of mortgage supply leads to 0.3 percentage points higher annual growth rate of housing prices. Reduced form regressions show that CRA-eligible neighborhoods experienced higher house price growth during the boom and sharper decline during the bust period. I use placebo tests to confirm that this effect is in fact channeled through the shift in mortgage supply by CRA-regulated banks and not by unobserved demand factors. Furthermore, my results indicate that CRA-induced mortgages went to borrowers with lower FICO scores, carried higher interest rates, and encountered more frequent delinquencies.

Local economic impact of boom and bust in mineral resource extraction in the United States: A spatial econometrics analysis

This paper examines how shocks in the U.S. mineral resource extraction (MRE) industry impact MRE-dependent counties using county level data between 1970- and 2012. A difference-in-difference fixed effects model and a spatial modeling to incorporate spatial heterogeneity and dependence among U.S. local areas that are in close geographical proximity are employed in this study. The results show that MRE industry employment grew faster during boom periods and slower during the bust period in MRE dependent counties. MRE earnings and earnings per worker grew slower during boom periods and faster during the bust period. The findings give evidence of negative spatial indirect spillover effects between neighboring counties’ MRE sector labor markets. An analysis of the effect of shocks in the MRE sector on the non-MRE sectors shows that in MRE dependent counties non-MRE sector employment grew slower during boom periods and faster during the bust period. Positive shocks in the MRE sector had no effect on the manufacturing sector labor market; however, negative shocks had a positively effect. Booms in the MRE sector positively impacted the construction sector, while negatively affecting the service and retail trade sectors’ labor markets in MRE dependent counties. Finally, this study finds that male population grew faster, while female population grew slower in the MRE dependent counties.

Trusting in the future: The re-emergence of state trust funds in the shale era

Energy-producing states confront numerous challenges related to the boom-and-bust of resource extraction, including substantial fluctuation in revenue produced by severance taxes. Revenues surge as drilling expands during booms, creating many pressures for immediate expenditure. This often sets up enormous strain during bust periods when revenues plunge as longer-term needs emerge. This paper, however, examines the small set of states that have devised unique mechanisms to prepare for future busts. It reviews two periods (1970s and 2010s) in which six oil and gas-producing states amended their state constitutions to place severance tax revenues into permanent trust funds for long-term stewardship. It examines the key political factors that prompted the formation of these funds while also considering their resilience and performance to date.

Forms and Norms: How Planning Affected Housing Prices Variation in Italy During the Crisis

According to numerous studies in the literature, urban planning norms have an important effect on housing prices. A large quantity of data and empirical studies focusing on building restrictions and housing prices refer to the American real estate market. The current study, instead, set out to examine the relationship between city-planning and the cost of housing in the Italian real estate market. While, however, recent studies carried out here have prevalently focused on the boom phase of the real estate cycle, the present study primarily probes the bust period. We used a multivariate regression model to analyze the effect of urban planning norms on housing (new and existing units) price variation. The model shows that in those localities where building regulations had permitted more buildings to be constructed during the boom phase, prices fell to deeper level during the bust one. These findings have implications with regard to the real estate crisis as well as to housing affordability policies here in Italy and elsewhere.

Icelandic boom and bust: immigration and the housing market

The housing market boom in Iceland in 2004–2007 was driven by international and domestic developments. A simple demand and supply model is fitted to data through the recent boom–bust period. The price equation (demand) is improved by including net immigration as an explanatory variable showing that demographic factors, in addition to mortgage market restructuring, help in explaining swings in the housing market. Evidence of a house price bubble is no longer detected when accounting for the effects of immigration with 1 per cent net immigration yielding a 4–6 per cent rise in house prices. Accuracy in forecasting house price developments is improved by accounting for housing investment behaviour in a separate (supply) equation. The sharp fall in housing investment in 2009 cannot, however, be modelled without the introduction of a dummy variable, accounting for the sudden stop in financing as the Icelandic banking sector failed in late 2008.

Testing the Stochastic Discount Factor Paradigm

We test the empirical validity of the stochastic discount factor (SDF) theory. We develop a model where the SDF theory holds when the parameters that relate the risk premium and the factors are common across assets. This property is then statistically assessed through slope homogeneity tests for panel data for the mean and quantiles of the assets' risk premium. Applications to different sets of assets confirm the empirical validity of the SDF theory for the average and central quantiles of the risk premium distribution, but not at the tails. These pricing anomalies suggest that assets are priced independently of the rest of the cross-section during boom and bust periods.

Boom and Bust of Foreign Assets under Integrated Banking Systems

We examine whether highly integrated banking systems across borders escalated the boom and the bust of foreign assets owned by banks before and after the global financial crisis. As the financial shock dramatically affected the banking system across the globe, considering only the primary and secondary exposures to the initial shock is inadequate to capture the effect of bank linkages. Using a new specification that accommodates the situation of interconnected banking systems, we explore an overall similarity of lending structures generating the shock amplification. We also investigate whether this effect is shown differently between the boom and the bust periods and between investing areas. To prevent the spread of financial shock, our findings suggest that banks should hold a unique funding structure.

Bust economics: foragers choose high quality habitats in lean times.

In environments where food resources are spatially variable and temporarily impoverished, consumers that encounter habitat patches with different food density should focus their foraging initially where food density is highest before they move to patches where food density is lower. Increasing missed opportunity costs should drive individuals progressively to patches with lower food density as resources in the initially high food density patches deplete. To test these expectations, we assessed the foraging decisions of two species of dasyurid marsupials (dunnarts: Sminthopsis hirtipes and S. youngsoni) during a deep drought, or bust period, in the Simpson Desert of central Australia. Dunnarts were allowed access to three patches containing different food densities using an interview chamber experiment. Both species exhibited clear preference for the high density over the lower food density patches as measured in total harvested resources. Similarly, when measuring the proportion of resources harvested within the patches, we observed a marginal preference for patches with initially high densities. Models analyzing behavioral choices at the population level found no differences in behavior between the two species, but models analyzing choices at the individual level uncovered some variation. We conclude that dunnarts can distinguish between habitat patches with different densities of food and preferentially exploit the most valuable. As our observations were made during bust conditions, experiments should be repeated during boom times to assess the foraging economics of dunnarts when environmental resources are high.

Property Tax Limits and Female Labor Supply: Evidence from the Housing Boom and Bust

This paper analyzes the impact of property tax limits on female labor supply. We exploit exogenous variation across time of housing market conditions in the housing boom and bust periods and geographic changes of property tax limits across states in the cross-state Combined Statistical Areas (CBSA) to identify a causal link between property tax limits and female labor supply. Theory predicts that the effects of property tax limits on female labor supply in the housing boom and bust periods are in opposite directions due to opposite income effects. As predicted, empirical results suggest that female labor force participation reduced by 0.7 to 1.4 percentage point in the housing boom (2005-2006) due to property tax limits. In contrast, females are associated with a negligible to 1.3 percentage point higher probability of workforce participation in the housing bust (2008-2009) due to such limits. We do not find an impact of property tax limits on hours of work for the female population.

How House Price Dynamics and Credit Constraints Affect the Equity Extraction of Senior Homeowners

Households can borrow against equity through different channels, including home equity lines of credit (HELOCs), second liens, cash-out refinancing, and--for senior homeowners--reverse mortgages. We use data from the New York Federal Reserve/Equifax Consumer Credit Panel, the U.S. Department of Housing and Urban Development, and other sources to jointly estimate the decision to extract equity through these different channels. Specifically, we identify the influence of credit constraints, house price dynamics and their interactions on the proportion of seniors in a ZIP code extracting through a given channel each year from 2004 to 2012: the boom and bust period in the U.S. housing market. Prior research finds credit constrained households were more responsive to house price gains than non-constrained households. Our results suggest that this response varies depending on the borrowing channel. As house prices increased, cash-out refinancing increased in credit-constrained areas, but HELOCs increased in less-credit-constrained areas. Further, when house prices fell, reverse mortgage originations increased--particularly in credit-constrained areas. We also observe differential responses to credit constraints and house price changes in minority versus non-minority neighborhoods.

Do Conspicuous Consumers Pay Higher Housing Premiums? Spatial and Temporal Variation in the United States

This study is the first to examine the relationship between conspicuous demand and housing price dynamics. We hypothesize that conspicuous consumers would want high‐end homes to signal their wealth and this housing consumption behavior would induce greater deviations from fundamental house prices. We test this by using a unique dataset that matches the consumers’ appetite for nonhousing luxury goods from Google Insights for Search to housing premiums that they pay for high‐end houses in U.S. Metropolitan Statistical Areas (MSAs) during 2004–2011. The estimation results demonstrate that controlling for a wide range of MSA demographic and economic characteristics, conspicuous demand has a significant, positive relationship with housing premiums. This relationship varies spatially and temporally. Conspicuous demand has a stronger relationship with a price increase in high‐end homes in MSAs with a steady, higher housing premium than in MSAs with a volatile, lower premium during the boom period. In MSAs with a steady, higher housing premium, the relationship remains significant even during the bust period, potentially contributing to maintaining higher housing premiums.