IDEAS home Printed from https://ideas.repec.org/p/qsh/wpaper/357401.html

Extrapolation and Bubbles

Author

Listed:
  • Nicholas Barberis
  • Robin Greenwood
  • Lawrence Jin
  • Andrei Shleifer

Abstract

We present an extrapolative model of bubbles. In the model, many investors form their demand for a risky asset by weighing two signals?an average of the asset?s past price changes and the asset?s degree of overvaluation. The two signals are in conflict, and investors ?waver? over time in the relative weight they put on them. The model predicts that good news about fundamentals can trigger large price bubbles. We analyze the patterns of cash-flow news that generate the largest bubbles, the reasons why bubbles collapse, and the frequency with which they occur. The model also predicts that bubbles will be accompanied by high trading volume, and that volume increases with past asset returns. We present empirical evidence that bears on some of the model?s distinctive predictions.

Suggested Citation

  • Nicholas Barberis & Robin Greenwood & Lawrence Jin & Andrei Shleifer, 2015. "Extrapolation and Bubbles," Working Paper 357401, Harvard University OpenScholar.
    • Handle: RePEc:qsh:wpaper:357401
    as

    Download full text from publisher

    File URL: http://scholar.harvard.edu/shleifer/node/357401
    Download Restriction: no
    ---><---

    Other versions of this item:

    More about this item

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qsh:wpaper:357401. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Richard Brandon The email address of this maintainer does not seem to be valid anymore. Please ask Richard Brandon to update the entry or send us the correct address (email available below). General contact details of provider: https://edirc.repec.org/data/cbrssus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.