Rational Frenzies and Crashes
AbstractMost markets clear through a sequence of sales rather than through a Walrasian auctioneer. Because buyers can decide whether to buy now or later, rather than only now or never, their current `willingness to pay' is much more sensitive to price than is the demand curve. In consequence, markets will be extremely sensitive to new information, leading to frenzies where demand feeds upon itself, and crashes where price drops discontinuously. Although no buyer's independent reservation value reveals much about overall demand, a small increase in one such value can cause a large increase or decrease in average price.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 593.
Date of creation: Oct 1991
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Other versions of this item:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
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