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Bubbles, crashes and risk

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Author Info

  • Branch, William A.
  • Evans, George W.

Abstract

A restricted-perceptions equilibrium exists in which risk-averse agents believe stock prices follow a random walk with a conditional variance that is self-fulfilling. When agents estimate risk, bubbles and crashes arise. These effects are stronger when agents allow for ARCH in excess returns.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 120 (2013)
Issue (Month): 2 ()
Pages: 254-258

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Handle: RePEc:eee:ecolet:v:120:y:2013:i:2:p:254-258

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: Risk; Asset pricing; Bubbles; Adaptive learning;

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References

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  1. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  2. KevinJ. Lansing, 2010. "Rational and Near-Rational Bubbles Without Drift," Economic Journal, Royal Economic Society, vol. 120(549), pages 1149-1174, December.
  3. Paolo Gelain & Kevin J. Lansing, 2013. "House prices, expectations, and time-varying fundamentals," Working Paper Series 2013-03, Federal Reserve Bank of San Francisco.
  4. Gaunersdorfer, Andrea, 2000. "Endogenous fluctuations in a simple asset pricing model with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 799-831, June.
  5. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  6. Branch, William A. & Evans, George W., 2010. "Learning about Risk and Return: A Simple Model of Bubbles and Crashes," SIRE Discussion Papers 2010-33, Scottish Institute for Research in Economics (SIRE).
  7. Robert B. Barsky & J. Bradford De Long, 1992. "Why Does the Stock Market Fluctuate?," NBER Working Papers 3995, National Bureau of Economic Research, Inc.
  8. Marius Jurgilas & Kevin J. Lansing, 2012. "Housing bubbles and homeownership returns," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun25.
  9. Brock, W.A. & Hommes, C.H., 1996. "Hetergeneous Beliefs and Routes to Chaos in a Simple Asset Pricing Model," Working papers 9621, Wisconsin Madison - Social Systems.
  10. Alan Greenspan, 2005. "Reflections on central banking," Speech 126, Board of Governors of the Federal Reserve System (U.S.).
  11. Robin Greenwood & Andrei Shleifer, 2013. "Expectations of Returns and Expected Returns," NBER Working Papers 18686, National Bureau of Economic Research, Inc.
  12. Timmermann, Allan G, 1993. "How Learning in Financial Markets Generates Excess Volatility and Predictability in Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1135-45, November.
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Citations

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Cited by:
  1. Zhu, Xiaoneng, 2013. "Perpetual learning and stock return predictability," Economics Letters, Elsevier, vol. 121(1), pages 19-22.
  2. Guharay, Samar K. & Thakur, Gaurav S. & Goodman, Fred J. & Rosen, Scott L. & Houser, Daniel, 2013. "Analysis of non-stationary dynamics in the financial system," Economics Letters, Elsevier, vol. 121(3), pages 454-457.

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