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Shakeouts and Market Crashes

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  • Alessandro Barbarino
  • Boyan Jovanovic

Abstract

Stock-market crashes tend to follow run-ups in prices. These episodes look like bubbles that gradually inflate and then suddenly burst. We show that such bubbles can form in a Zeira-Rob type of model in which demand size is uncertain. Two conditions are sufficient for this to happen: A declining hazard rate in the prior distribution over market size and a positively sloped supply of capital to the industry. For the period 1971-2001 we fit the model to the Telecom sector.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10556.

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Date of creation: Jun 2004
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:10556

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  1. Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 548-65, June.
  2. Zeira, Joseph, 1987. "Investment as a Process of Search," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(1), pages 204-10, February.
  3. Zeira, Joseph, 1993. "Informational Overshooting, Booms and Crashes," CEPR Discussion Papers, C.E.P.R. Discussion Papers 823, C.E.P.R. Discussion Papers.
  4. Jovanovic, Boyan & MacDonald, Glenn M, 1994. "The Life Cycle of a Competitive Industry," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(2), pages 322-47, April.
  5. Michele Boldrin & David K. Levine, 1999. "Growth Cycles and Market Crashes," Levine's Working Paper Archive 2028, David K. Levine.
  6. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, Econometric Society, vol. 71(1), pages 173-204, January.
  7. Horvath, Michael & Schivardi, Fabiano & Woywode, Michael, 2001. "On industry life-cycles: delay, entry, and shakeout in beer brewing," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 19(7), pages 1023-1052, July.
  8. Boyan Jovanovic & Peter L. Rousseau, 2000. "Technology and the Stock Market: 1885-1998," Vanderbilt University Department of Economics Working Papers 0042, Vanderbilt University Department of Economics.
  9. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(4), pages 655-75, July.
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