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Bubbles and Market Crashes

Author

Listed:
  • Michael Youssefmir
  • Bernardo Huberman
  • Tad Hogg

Abstract

We present a dynamical theory of asset 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

  • Michael Youssefmir & Bernardo Huberman & Tad Hogg, 1994. "Bubbles and Market Crashes," Finance 9409001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:9409001
    Note: 21 pages. Postcript file compressed and uuencoded. Also available via anonymous ftp at ftp://parcftp.xerox.com in the pub/dynamics directory.
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    References listed on IDEAS

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    1. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
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    Cited by:

    1. Ken Steiglitz & Liadan I. O'Callaghan, "undated". "Microsimulation of Markets and Endogenous Price Bubbles," Computing in Economics and Finance 1997 59, Society for Computational Economics.

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