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Bubbles, crashes and risk

  • Branch, William A.
  • Evans, George W.

A restricted-perceptions equilibrium exists in which risk-averse agents believe stock prices follow a random walk with a conditional variance that is self-fulfilling. When agents estimate risk, bubbles and crashes arise. These effects are stronger when agents allow for ARCH in excess returns.

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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 120 (2013)
Issue (Month): 2 ()
Pages: 254-258

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Handle: RePEc:eee:ecolet:v:120:y:2013:i:2:p:254-258
DOI: 10.1016/j.econlet.2013.04.030
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  1. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
  2. Wiliam Branch & George W. Evans, . "Learning about Risk and Return: A Simple Model of Bubbles and Crashes," University of Oregon Economics Department Working Papers 2008-1, University of Oregon Economics Department.
  3. Robin Greenwood & Andrei Shleifer, 2013. "Expectations of Returns and Expected Returns," NBER Working Papers 18686, National Bureau of Economic Research, Inc.
  4. Kevin J. Lansing, 2007. "Rational and Near-Rational Bubbles Without Drift," 2007 Meeting Papers 970, Society for Economic Dynamics.
  5. Gaunersdorfer, Andrea, 2000. "Endogenous fluctuations in a simple asset pricing model with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 799-831, June.
  6. Gelain, Paolo & Lansing, Kevin J., 2014. "House prices, expectations, and time-varying fundamentals," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 3-25.
  7. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  8. Allan G. Timmermann, 1993. "How Learning in Financial Markets Generates Excess Volatility and Predictability in Stock Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 1135-1145.
  9. Marius Jurgilas & Kevin J. Lansing, 2012. "Housing bubbles and homeownership returns," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun25.
  10. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  11. Robert B. Barsky & J. Bradford De Long, 1992. "Why Does the Stock Market Fluctuate?," NBER Working Papers 3995, National Bureau of Economic Research, Inc.
  12. Alan Greenspan, 2005. "Reflections on central banking," Speech 126, Board of Governors of the Federal Reserve System (U.S.).
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