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Bubbles and crashes in a Behavioural Finance Model

  • Paul De Grauwe

    (University of Leuven)

  • Marianna Grimaldi

    (Sveriges Riksbank)

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    We develop a simple model of the exchange rate in which agents optimize their portfolio and use different forecasting rules. They check the profitability of these rules ex post and select the more profitable one.This model produces two kinds of equilibria, a fundamental and a bubble one. In a stochastic environment the model generates a complex dynamics in which bubbles and crashes occur at unpredictable moments. We contrast these "behavioural" bubbles with "rational" bubbles.

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    Paper provided by Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro in its series Working Papers de Economia (Economics Working Papers) with number 25.

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    Length: 41 pages
    Date of creation: Aug 2005
    Date of revision:
    Handle: RePEc:ave:wpaper:252005
    Contact details of provider: Postal: Campus Universitario de Santiago, 3810-193 Aveiro
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    19. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980.
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