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On the Dynamics of Speculation in a Model of Bubbles and Manias

Author

Listed:
  • Carlos J. Perez

    (Universidad Diego Portales)

  • Manuel Santos

    (University of Miami)

Abstract

We present an asset-trading model of `boom and bust' with homogeneous information. Our model builds on narrative accounts of asset pricing bubbles that hint at the interaction between behavioral and rational traders. A bubble emerges only if a mania could develop: behavioral traders temporarily outweigh rational traders with positive probability. We characterize the various phases of speculative behavior, and analyze how they may vary with changes in primitive parameters, asymmetric information, a single rational trader, and the arrival of new information.

Suggested Citation

  • Carlos J. Perez & Manuel Santos, 2017. "On the Dynamics of Speculation in a Model of Bubbles and Manias," Working Papers 2017-02, University of Miami, Department of Economics.
  • Handle: RePEc:mia:wpaper:2017-02
    as

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    File URL: http://bus.miami.edu/_assets/files/repec/WP2017-02.pdf
    File Function: First version, 2017
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bubbles; manias; behavioral trading; smart money; preemption game Publication Status: Ex. Under Review;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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