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Bubbles and crashes with partially sophisticated investors

Milo Bianchi, Philippe Jehiel

Published: 2008

eBook Abstract

We consider a purely speculative market with finite horizon and complete information. We introduce partially sophisticated investors, who know the average buy and sell strategies of other traders, but lack a precise understanding of how these strategies depend on the history of trade. In this setting, it is common knowledge that the market is overvalued and bound to crash, but agents hold different expectations about the date of the crash. We define conditions for the existence of equilibrium bubbles and crashes, characterize their structure, and show how bubbles may last longer when the amount of fully rational traders increases.

eBook License: Copyrighted (Personal Use Only)

Free ebook to download in PDF format - 34 pages

Tags : Speculative bubbles, crashes, bounded rationality.