We formulate strategic aspects of speculative arbitrageurs in a stock market as a
generalization of timing game with behavioral types explored by Matsushima (2013b).
A company raises huge funds during the bubble driven by positive feedback traders’
euphoria by issuing shares in a socially harmful manner. The arbitrageurs borrow
money from positive feedback traders under a regulation on leverage ratio and purchase
credit default swaps defined as bubble-contingent claim from them. We demonstrate a
theoretical ground for considering the availability of credit default swap associated with
a high leverage ratio as a powerful policy method to deter harmful bubbles.