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Inefficient Information Aggregation as a

  • Friedman, Daniel
  • Aoki, Masanao

This paper presents a new theory of bubbles, or discrepancies between the market clearing price and the fundamental value of an asset. In the authors' setting, Bayesian traders, oriented towards long-term gains, receive private information ("news") and also make inferences from noisy price signals. Price exhibits higher variance than fundamental value (the latter fully-aggregated expected value) especially when news is informative but infrequent. The corresponding bubbles are self-limiting but may exhibit momentum and over-shooting. A parametric example, involving the exponential/gamma conjugate families, is provided. Copyright 1992 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

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Article provided by Wiley Blackwell in its journal Bulletin of Economic Research.

Volume (Year): 44 (1992)
Issue (Month): 4 (October)
Pages: 251-79

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Handle: RePEc:bla:buecrs:v:44:y:1992:i:4:p:251-79
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