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Effects of Reputation in Bubbles and Crashes

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  • Hitoshi Matsushima

    (Faculty of Economics, University of Tokyo)

Abstract

We analyze the stock market by modeling it as a timing game among arbitrageurs for beating the gun. We assume that (1) arbitrageurs are behavioral with a small probability, (2) the bubble soft-lands, and (3) the postcrash price increases as the X-day is postponed. Due to these assumptions, the effect of reputation assumes importance because any rational arbitrageur is willing to build a reputation in order to ride the bubble. It is demonstrated that the bubble persists for a long period as an outcome of a unique symmetric Nash equilibrium, even if all arbitrageurs are almost certainly rational.

Suggested Citation

  • Hitoshi Matsushima, 2008. "Effects of Reputation in Bubbles and Crashes," CIRJE F-Series CIRJE-F-560, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2008cf560
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2008/2008cf560.pdf
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    References listed on IDEAS

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    Cited by:

    1. Mei Li & Frank Milne, 2010. "A Large Trader in Bubbles and Crashes: an Application to Currency Attacks," Working Papers 1004, University of Guelph, Department of Economics and Finance.

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