Effects of Reputation in Bubbles and Crashes
AbstractWe 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.
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-560.
Length: 43 pages
Date of creation: Apr 2008
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-04-21 (All new papers)
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