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Informational Overshooting, Booms and Crashes

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Author Info
Zeira, Joseph

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Abstract

This paper offers an informational explanation for asset price booms and crashes. If market fundamentals change, but the length of this process of change is unknown, market participants try to learn about it by observing market outcomes. This learning generates a boom and a crash, which we call `informational overshooting'. The paper applies this idea to real-estate markets, to exchange markets and to stock markets. It shows that entry of a new group of investors to a stock market can generate such a boom and a crash. One implication of this result is that financial liberalizations tend to be followed by stock market booms and crashes.

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Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 823.

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Date of creation: Sep 1993
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Handle: RePEc:cpr:ceprdp:823

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Related research
Keywords: Asset Markets Booms Crashes Information Rational Expectations

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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Caplin, Andrew & Leahy, John V, 1993. "Sectoral Shocks, Learning, and Aggregate Fluctuations," Review of Economic Studies, Blackwell Publishing, vol. 60(4), pages 777-94, October. [Downloadable!] (restricted)
  2. Garber, Peter M, 1990. "Famous First Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 35-54, Spring. [Downloadable!] (restricted)
  3. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
    Other versions:
  4. Mayer, Colin, 1988. "New issues in corporate finance," European Economic Review, Elsevier, vol. 32(5), pages 1167-1183, June. [Downloadable!] (restricted)
    Other versions:
  5. Benjamin M. Friedman & David I. Laibson, 1989. "Economic Implications of Extraordinary Movements in Stock Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1989-2), pages 137-190. [Downloadable!]
    Other versions:
  6. Mayshar, Joram, 1979. "Transaction Costs in a Model of Capital Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 673-700, August. [Downloadable!] (restricted)
  7. Romer, David, 1993. "Rational Asset-Price Movements without News," American Economic Review, American Economic Association, vol. 83(5), pages 1112-30, December. [Downloadable!] (restricted)
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  8. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 58(4), pages 655-75, July. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alessandro Barbarino & Boyan Jovanovic, 2004. "Shakeouts and Market Crashes," NBER Working Papers 10556, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • Alessandro Barbarino & Boyan Jovanovic, 2007. "Shakeouts And Market Crashes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 385-420, 05. [Downloadable!] (restricted)
  2. Nicolas Magud, 2002. "On Asymmetric Business Cycles and the Effectiveness of Counter-Cyclical Fiscal Policies," University of Oregon Economics Department Working Papers 2005-20, University of Oregon Economics Department, revised 01 May 2005. [Downloadable!]
  3. Laura Veldkamp & Christian Hellwig, 2006. "Knowing What Others Know: Coordination Motives in Information Acquisition," Working Papers 06-14, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
    Other versions:
  4. Han N. Ozsoylev, 2005. "Amplification and Asymmetry in Crashes and Frenzies," OFRC Working Papers Series 2005fe11, Oxford Financial Research Centre. [Downloadable!]
  5. Andolfatto, David, 2003. "Monetary Implications of the Hayashi-Prescott Hypothesis for Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(4), pages 1-20, December. [Downloadable!]
    Other versions:
  6. Fracois Ortalo-Magne & Sven Rady, 2000. "Why are Housing Prices so Volatile? Income Shocks in a Stochastic Heterogeneous-Agents Model," Econometric Society World Congress 2000 Contributed Papers 1352, Econometric Society. [Downloadable!]
  7. Frankel, David M., 2007. "Adaptive Expectations and Stock Market Crashes," Staff General Research Papers 12817, Iowa State University, Department of Economics. [Downloadable!]
  8. Michele Boldrin & David K. Levine, 1999. "Growth Cycles and Market Crashes," Levine's Working Paper Archive 2028, UCLA Department of Economics. [Downloadable!]
    Other versions:
  9. Kevin J. Lansing, 2005. "Lock-in of extrapolative expectations in an asset pricing model," Working Papers in Applied Economic Theory 2004-06, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  10. Francois Ortalo-Magne & Sven Rady, 2001. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  11. Christian Hellwig, 2005. "Knowing What Others Know: Coordination Motives in Information Acquisition (March 2007, with Laura Veldkamp)," UCLA Economics Online Papers 369, UCLA Department of Economics. [Downloadable!]
  12. Zhu Wang, 2005. "Technological innovation and market turbulence: the dot-com experience," Payments System Research Working Paper PSR WP 05-02, Federal Reserve Bank of Kansas City. [Downloadable!]
    Other versions:
  13. Gil Mehrez & Daniel Kaufmann, 2003. "Transparency, Liberalization and Financial Crises," Finance 0308008, EconWPA. [Downloadable!]
  14. Bart Hobijn & Boyan Jovanovic, 2000. "The Information Technology Revolution and the Stock Market: Evidence," NBER Working Papers 7684, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. Mehrez, Gil & Kaufmann, Daniel, 2000. "Transparency, liberalization, and banking crisis," Policy Research Working Paper Series 2286, The World Bank. [Downloadable!]
  16. Laura Veldkamp, 2003. "Learning Asymmetries in Real Business Cycles," Working Papers 03-21, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
    Other versions:
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