
Contents
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9.1 Some Evidence of Positive Feedback from Past Returns to the Demand for Risky Assets 9.1 Some Evidence of Positive Feedback from Past Returns to the Demand for Risky Assets
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9.1.1 Definition of Variables 9.1.1 Definition of Variables
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9.1.2 Visual Investigation of the Relationship Between Relative Margin Debt and the Present Value of Excess Equity Returns 9.1.2 Visual Investigation of the Relationship Between Relative Margin Debt and the Present Value of Excess Equity Returns
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9.1.3 Adjustment of Sample Data Through Linear Regression 9.1.3 Adjustment of Sample Data Through Linear Regression
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9.1.4 Additional Tests 9.1.4 Additional Tests
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9.2 The Supply of Money and the Demand for Risky Assets 9.2 The Supply of Money and the Demand for Risky Assets
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9.3 Policy Implications 9.3 Policy Implications
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9.3.1 Benign Neglect Is Not an Option 9.3.1 Benign Neglect Is Not an Option
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9.3.2 Policy Rates Are Inappropriate 9.3.2 Policy Rates Are Inappropriate
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9.3.3 Regulation Is the Only Option 9.3.3 Regulation Is the Only Option
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Nine Perceived Returns and the Modeling of Financial Behavior
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Published:November 2014
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Abstract
This chapter describes a few simple models that explain financial behavior by the perceived returns on financial assets and thereby provide evidence of positive feedback from past returns to the demand for risky assets. These models bring to light nonlinear relationships between perceived returns and observed investors' behavior. The chapter presents a few examples that are particularly relevant with respect to the dynamics of financial instability. The discussion begins with some empirical evidence of a positive feedback from past equity returns into the demand for equities. As this demand exhibits a nonlinear pattern that is similar to the one found by Maurice Allais in his HRL formulation of the supply of money, the findings are compared with those of Allais. The chapter concludes with a discussion of the policy implications of positive feedback.
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