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Bubbles and Market Crashes

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Author Info
Youssefmir, Michael
Huberman, Bernardo A
Hogg, Tad
Abstract

We present a dynamical theory of asset price bubbles that exhibits the appearance of bubbles and their subsequent crashes. We show that when speculative trends dominate over fundamental beliefs, bubbles form, leading to the growth of asset prices away from their fundamental value. This growth makes the system increasingly susceptible to any exogenous shock, thus eventually precipitating a crash. We also present computer experiments which in their aggregate behavior confirm the predictions of the theory. Citation Copyright 1998 by Kluwer Academic Publishers.

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Article provided by Springer in its journal Computational Economics.

Volume (Year): 12 (1998)
Issue (Month): 2 (October)
Pages: 97-114
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Handle: RePEc:kap:compec:v:12:y:1998:i:2:p:97-114

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  1. Jason Childs, 2007. "Rate of Return Parity with Robot Asset Traders," Computational Economics, Springer, vol. 29(1), pages 1-12, February. [Downloadable!] (restricted)
  2. J. Doyne Farmer & Shareen Joshi, 2000. "The price dynamics of common trading strategies," Quantitative Finance Papers cond-mat/0012419, arXiv.org. [Downloadable!]
  3. Didier Sornette & Wei-Xing Zhou, 2005. "Importance of Positive Feedbacks and Over-confidence in a Self-Fulfilling Ising Model of Financial Markets," Quantitative Finance Papers cond-mat/0503607, arXiv.org, revised Mar 2005. [Downloadable!]
  4. J. Doyne Farmer & Shareen Joshi, 2000. "The Price Dynamics of Common Trading Strategies," Working Papers 00-12-069, Santa Fe Institute.
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