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Churning Bubbles (Reprint 039)

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  • Franklin Allen
  • Gary Gorton

Abstract

Are stock prices determined by fundamentals or can "bubbles" exist? An important issue in this debate concerns the circumstances in which deviations from fundamentals are consistent with rational behavior. When there is asymmetric information between investors and portfolio managers, portfolio managers have an incentive to churn; their trades are not motivated by changes in information, liquidity needs or risk sharing but rather by a desire to profit at the expense of the investors that hire them. As a result, assets can trade at prices which do not reflect their fundamentals and bubbles can exist.

Suggested Citation

  • Franklin Allen & Gary Gorton, "undated". "Churning Bubbles (Reprint 039)," Rodney L. White Center for Financial Research Working Papers 24-92, Wharton School Rodney L. White Center for Financial Research.
  • Handle: RePEc:fth:pennfi:24-92
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