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Financing Harmful Bubbles


  • Hitoshi Matsushima

    () (Faculty of Economics, University of Tokyo)


We model the stock market as a timing game, in which arbitrageurs who are not expected to be certainly rational compete over profit by bursting the bubble caused by investors' euphoria. The manager raises money by issuing shares and the arbitrageurs use leverage. If leverage is weakly regulated, it is the unique Nash equilibrium that the bubble persists for a long time. This holds even if the euphoria is negligible and all arbitrageurs are expected to be almost certainly rational. This bubble causes serious harm to the society, because the manager uses the money raised for his personal benefit.

Suggested Citation

  • Hitoshi Matsushima, 2010. "Financing Harmful Bubbles," KIER Working Papers 711, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:711

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    References listed on IDEAS

    1. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    2. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    3. Abreu, Dilip & Brunnermeier, Markus K., 2002. "Synchronization risk and delayed arbitrage," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 341-360.
    4. Markus K. Brunnermeier & Stefan Nagel, 2004. "Hedge Funds and the Technology Bubble," Journal of Finance, American Finance Association, vol. 59(5), pages 2013-2040, October.
    5. Matsushima, Hitoshi, 2013. "Behavioral aspects of arbitrageurs in timing games of bubbles and crashes," Journal of Economic Theory, Elsevier, vol. 148(2), pages 858-870.
    6. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, June.
    7. repec:pri:cepsud:200malkiel is not listed on IDEAS
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    Cited by:

    1. Matsushima, Hitoshi, 2013. "Behavioral aspects of arbitrageurs in timing games of bubbles and crashes," Journal of Economic Theory, Elsevier, vol. 148(2), pages 858-870.
    2. Hitoshi Matsushima, 2012. "Role of Leverage in Bubbles and Crashes," CIRJE F-Series CIRJE-F-859, CIRJE, Faculty of Economics, University of Tokyo.
    3. Hitoshi Matsushima, 2013. "Impact of Financial Regulation and Innovation on Bubbles and Crashes due to Limited Arbitrage: Awareness Heterogeneity," CARF F-Series CARF-F-306, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

    More about this item


    Euphoria; Leverage; Rational and Behavioral Arbitrageurs; Harmful Bubble; Unique Nash Equilibrium;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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