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Bubbles and Crashes

Author

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  • Dilip Abreu

    () (Princeton University, Princeton, U.S.A.)

  • Markus K. Brunnermeier

    () (Princeton University, Princeton, U.S.A.)

Abstract

We present a model in which an asset bubble can persist despite the presence of rational arbitrageurs. The resilience of the bubble stems from the inability of arbitrageurs to temporarily coordinate their selling strategies. This "synchronization problem" together with the individual incentive to "time the market" results in the persistence of bubbles over a substantial period. Since the derived trading equilibrium is unique, our model rationalizes the existence of bubbles in a strong sense. The model also provides a natural setting in which news events, by enabling synchronization, can have a disproportionate impact relative to their intrinsic informational content. Copyright The Econometric Society 2003.

Suggested Citation

  • Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
  • Handle: RePEc:ecm:emetrp:v:71:y:2003:i:1:p:173-204
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    JEL classification:

    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • J1 - Labor and Demographic Economics - - Demographic Economics

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