Abreu, Dilip and Brunnermeier, Markus K. (2002) Bubbles and crashes. Discussion paper, 401. Financial Markets Group, London School of Economics and Political Science, London, UK.
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We present a model in which an asset bubble can persist despite the presence of rational arbitrageurs. The resilience of the bubble stems from the inability of arbitrageurs to temporarily coordinate their selling strategies. This synchronization problem together with the individual incentive to time the market results in the persistence of bubbles over a substantial period of time. Since the derived trading equilibrium is unique, our model rationalizes the existence of bubbles in a strong sense. The model also provides a natural setting in which public events, by enabling synchronization, can have a disproportionate impact relative to their intrinsic informational content.
|Item Type:||Monograph (Discussion Paper)|
|Additional Information:||© 2002 The Authors|
|Library of Congress subject classification:||H Social Sciences > HF Commerce
H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
|Sets:||Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
|Date Deposited:||19 Aug 2009 11:06|
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