Abreu, Dilip and Brunnermeier, Markus K. (2002) Bubbles and crashes. Financial Markets Group Discussion Papers (401). Financial Markets Group, The London School of Economics and Political Science, London, UK.
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Abstract
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) |
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| Official URL: | http://fmg.ac.uk |
| Additional Information: | © 2002 The Authors |
| Divisions: | Financial Markets Group |
| Subjects: | H Social Sciences > HF Commerce H Social Sciences > HG Finance H Social Sciences > HB Economic Theory |
| JEL classification: | E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General |
| Date Deposited: | 19 Aug 2009 11:06 |
| Last Modified: | 13 Sep 2024 19:47 |
| URI: | http://eprints.lse.ac.uk/id/eprint/24905 |
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