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Behavioral Aspects of Arbitrageurs in Timing Games of Bubbles and Crashes

  • Hitoshi Matsushima

    (Faculty of Economics, University of Tokyo)

We model a timing game of bubbles and crashes a la Abreu and Brunnermeier (2003), in which arbitrageurs compete with each other to beat the gun in a stock market. However, unlike Abreu and Brunnermeier, instead of assuming sequential awareness, the present paper assumes that with a small probability, each arbitrageur is behavioral and committed to ride the bubble at all times. We show that with incomplete information, even rational arbitrageurs are willing to ride the bubble. In particular, the bubble can persist for a long period as the unique Nash equilibrium outcome.

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File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2009/2009cf606.pdf
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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-606.

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Length: 39pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:tky:fseres:2009cf606
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  1. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
  2. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers.
  3. D. Abreu & F. Gul, 1998. "Bargaining and Reputation," Princeton Economic Theory Papers 00s9, Economics Department, Princeton University.
  4. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 27(2), pages 245-252, August.
  5. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers.
  6. Hitoshi Matsushima, 2010. "Financing Harmful Bubbles," KIER Working Papers 711, Kyoto University, Institute of Economic Research.
  7. Allen F. & Morris S. & Postlewaite A., 1993. "Finite Bubbles with Short Sale Constraints and Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 61(2), pages 206-229, December.
  8. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 323-36, May.
  9. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  10. Allen, Franklin & Gorton, Gary, 1993. "Churning Bubbles," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 813-36, October.
  11. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
  12. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  13. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, March.
  14. Abreu, Dilip & Brunnermeier, Markus K., 2002. "Synchronization risk and delayed arbitrage," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 341-360.
  15. Conlon, John R., 2003. "Hope springs eternal: learning and the stability of cooperation in short horizon repeated games," Journal of Economic Theory, Elsevier, vol. 112(1), pages 35-65, September.
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