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Modeling Prices from Speculative Markets: Bursting Bubbles or Deflating Balloons?

Author

Listed:
  • Hafner, C.
  • Harvey, A. C.
  • Wang, L.

Abstract

Speculative markets may be characterized by sharp falls after a slow build up. Sometimes the converse happens. We suggest a number of mechanisms that are able to produce this kind of behaviour and we demonstrate their plausibility by simulation. The models are then fitted to daily data on Bitcoin. In constructing these models we show that it is essential to take account of volatility and non-normality. We also investigate the possibility of a dynamic tail index. The conclusion, at least for Bitcoin, is that speculative markets are more likely to behave like balloons than bubbles. In other words, there is rapid inflation followed by a slow decline.

Suggested Citation

  • Hafner, C. & Harvey, A. C. & Wang, L., 2025. "Modeling Prices from Speculative Markets: Bursting Bubbles or Deflating Balloons?," Cambridge Working Papers in Economics 2523, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2523
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    References listed on IDEAS

    as
    1. Gary B. Gorton & Elizabeth C. Klee & Chase P. Ross & Sharon Y. Ross & Alexandros P. Vardoulakis, 2022. "Leverage and Stablecoin Pegs," NBER Working Papers 30796, National Bureau of Economic Research, Inc.
    2. Durbin, James & Koopman, Siem Jan, 2012. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, edition 2, number 9780199641178.
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