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Informational overshooting, booms, and crashes

  • Zeira, Joseph

This paper offers an informational explanation for asset price booms and crashes. If market fundamentals change, but the length of this process of change is unknown, market participants try to learn about it by observing market outcomes. This learning generates a boom and a crash, which we call `informational overshooting'. The paper applies this idea to real-estate markets, to exchange markets and to stock markets. It shows that entry of a new group of investors to a stock market can generate such a boom and a crash. One implication of this result is that financial liberalizations tend to be followed by stock market booms and crashes.

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File URL: http://www.sciencedirect.com/science/article/B6VBW-3VF9CWM-C/2/f1ca57b8c1f136b3202c6af11b1ec5fa
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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 43 (1999)
Issue (Month): 1 (February)
Pages: 237-257

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Handle: RePEc:eee:moneco:v:43:y:1999:i:1:p:237-257
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. White, Eugene N, 1990. "The Stock Market Boom and Crash of 1929 Revisited," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 67-83, Spring.
  2. Mayer, Colin, 1987. "New Issues in Corporate Finance," CEPR Discussion Papers 181, C.E.P.R. Discussion Papers.
  3. Barsky, Robert B. & Long, J. Bradford De, 1990. "Bull and Bear Markets in the Twentieth Century," The Journal of Economic History, Cambridge University Press, vol. 50(02), pages 265-281, June.
  4. 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.
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  6. Mayshar, Joram, 1979. "Transaction Costs in a Model of Capital Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 673-700, August.
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  8. Gerard Gennotte and Hayne Leland., 1989. "Market Liquidity, Hedging and Crashes," Research Program in Finance Working Papers RPF-184, University of California at Berkeley.
  9. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
  10. Benjamin M. Friedman & David I. Laibson, 1989. "Economic Implications of Extraordinary Movements in Stock Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(2), pages 137-190.
  11. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  12. Romer, David, 1993. "Rational Asset-Price Movements without News," American Economic Review, American Economic Association, vol. 83(5), pages 1112-30, December.
  13. Caplin, Andrew & Leahy, John V, 1993. "Sectoral Shocks, Learning, and Aggregate Fluctuations," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 777-94, October.
  14. Garber, Peter M, 1990. "Famous First Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 35-54, Spring.
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