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Shakeouts and Market Crashes

Author

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  • Alessandro Barbarino
  • Boyan Jovanovic

Abstract

Stock-market crashes tend to follow run-ups in prices. These episodes look like bubbles that gradually inflate and then suddenly burst. We show that such bubbles can form in a Zeira-Rob type of model in which demand size is uncertain. Two conditions are sufficient for this to happen: A declining hazard rate in the prior distribution over market size and a positively sloped supply of capital to the industry. For the period 1971-2001 we fit the model to the Telecom sector.

Suggested Citation

  • Alessandro Barbarino & Boyan Jovanovic, 2004. "Shakeouts and Market Crashes," NBER Working Papers 10556, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10556 Note: AP EFG
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    References listed on IDEAS

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    1. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    2. Joseph Zeira, 2000. "Informational overshooting, booms and crashes," Proceedings, Federal Reserve Bank of San Francisco.
    3. Jovanovic, Boyan & MacDonald, Glenn M, 1994. "The Life Cycle of a Competitive Industry," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 322-347, April.
    4. Zeira, Joseph, 1987. "Investment as a Process of Search," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 204-210, February.
    5. Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, vol. 84(3), pages 548-565, June.
    6. Boldrin, Michele & Levine, David K., 2001. "Growth Cycles and Market Crashes," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 13-39, January.
    7. Horvath, Michael & Schivardi, Fabiano & Woywode, Michael, 2001. "On industry life-cycles: delay, entry, and shakeout in beer brewing," International Journal of Industrial Organization, Elsevier, vol. 19(7), pages 1023-1052, July.
    8. Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 655-675.
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    Citations

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    Cited by:

    1. Oscar Gutiérrez & Francisco Ruiz-Aliseda, 2011. "Real options with unknown-date events," Annals of Finance, Springer, vol. 7(2), pages 171-198, May.
    2. Biais, Bruno & Rochet, Jean-Charles & Woolley, Paul, 2013. "The dynamics of innovation and risk," TSE Working Papers 13-448, Toulouse School of Economics (TSE).
    3. Biais, Bruno & Rochet, Jean-Charles & Woolley, Paul, 2009. "The lifecycle of the financial sector and other speculative industries," LSE Research Online Documents on Economics 24417, London School of Economics and Political Science, LSE Library.
    4. André van Stel & Andrew Burke, 2008. "The Entrepreneurial Adjustment Process in Disequilibrium," Scales Research Reports H200809, EIM Business and Policy Research.
    5. Bruno Biais & Jean-Charles Rochet & Paul Woolley, 2010. "Innovations, rents and risk," FMG Discussion Papers dp659, Financial Markets Group.
    6. Óscar Gutiérrez & Francisco Ruiz-Aliseda, 2009. "Entry Patterns Over The Product Life Cycle," Manchester School, University of Manchester, vol. 77(5), pages 594-610, September.
    7. Boris Podobnik & Davor Horvatic & Alexander M. Petersen & Branko Urov{s}evi'c & H. Eugene Stanley, 2010. "Bankruptcy risk model and empirical tests," Papers 1011.2670, arXiv.org.
    8. Emin M. Dinlersoz & Rubén Hernández-Murillo, 2004. "The diffusion of electronic business in the U.S," Working Papers 2004-009, Federal Reserve Bank of St. Louis.
    9. Plehn-Dujowich, Jose M., 2009. "Entry and exit by new versus existing firms," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 214-222, March.
    10. Emin M. Dinlersoz & Rubén Hernández-Murillo, 2005. "The diffusion of electronic business in the United States," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 11-34.
    11. repec:ebl:ecbull:v:12:y:2005:i:10:p:1-8 is not listed on IDEAS
    12. Sylvain Champonnois, 2011. "The limits of market discipline: proprietary trading and aggregate risk," 2011 Meeting Papers 1013, Society for Economic Dynamics.
    13. Geng Li, 2006. "Learning by investing--embodied technology and business cycles," Finance and Economics Discussion Series 2007-15, Board of Governors of the Federal Reserve System (U.S.).
    14. Tomura, Hajime, 2010. "International capital flows and expectation-driven boom-bust cycles in the housing market," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1993-2009, October.
    15. Chia-Hui Chen & Junichiro Ishida, 2017. "A War of Attrition with Experimenting Players," ISER Discussion Paper 1014, Institute of Social and Economic Research, Osaka University.
    16. OHYAMA Atsushi, 2017. "Industry Growth through Spinoffs and Startups," Discussion papers 17057, Research Institute of Economy, Trade and Industry (RIETI).
    17. Hajime Tomura, 2008. "A Model of Housing Boom and Bust in a Small Open Economy," Staff Working Papers 08-9, Bank of Canada.
    18. Zhu Wang, 2008. "Income Distribution, Market Size and the Evolution of Industry," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 542-565, July.
    19. Kumar, Praveen & Langberg, Nisan, 2013. "Information manipulation and rational investment booms and busts," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 408-425.
    20. Bertomeu, Jeremy, 2009. "Endogenous shakeouts," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 435-440, May.

    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • L0 - Industrial Organization - - General

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