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Bubbles and Market Crashes

Author

Listed:
  • Bernardo A. Huberman
  • Thad Hogg

    (Dynamics of Computation Group Xerox Palo Alto Research Center Palo Alto, CA)

Abstract

We present a dynamical theory ofasset price bubbles that exhibits the appearance of bubbles and their subsequent crashes. We show that when speculative trends dominate over fundamental beliefs, bubbles form, leading to the growth of asset prices away from their fundamental value. This growth makes the system increasingly susceptible to any exogenous shock, thus eventually precipitating a crash.We also present computer experiments which in their aggregate behavior confirm the predictions of the theory.

Suggested Citation

  • Bernardo A. Huberman & Thad Hogg, "undated". "Bubbles and Market Crashes," Working Papers _003, Xerox Research Park.
    • Handle: RePEc:wop:xeroxp:_003
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