IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpfi/9409001.html

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.
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/9409/9409001.pdf
    Download Restriction: no
    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/9409/9409001.ps.gz
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. De Long, J Bradford, et al, 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    2. Stiglitz, Joseph E, 1990. "Symposium on Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 13-18, Spring.
    3. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    4. Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-185, May.
    5. De Long, J Bradford & Shleifer, Andrei & Summers, Lawrence H & Waldmann, Robert J, 1991. "The Survival of Noise Traders in Financial Markets," The Journal of Business, University of Chicago Press, vol. 64(1), pages 1-19, January.
    6. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    7. Garber, Peter M, 1990. "Famous First Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 35-54, Spring.
    8. Obstfeld, Maurice & Rogoff, Kenneth, 1986. "Ruling out divergent speculative bubbles," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 349-362, May.
    9. Van Horne, James C, 1985. "Of Financial Innovations and Excesses," Journal of Finance, American Finance Association, vol. 40(3), pages 621-631, July.
    10. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-777, October.
    11. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
    12. Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 745-770, August.
    13. Hamilton, James D. & Whiteman, Charles H., 1985. "The observable implications of self-fulfilling expectations," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 353-373, November.
    14. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. "Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, vol. 47(5), pages 1731-1764, December.
    15. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1991. "Speculative Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 529-546.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Scientific Monographs, Bank of Finland, number 2012_047.
    2. Taipalus, Katja, 2006. "Bubbles in the Finnish and US equities markets," Scientific Monographs, Bank of Finland, number 35/2006.
    3. Ahmed, Ehsan & Koppl, Roger & Rosser, J. Jr. & White, Mark V., 1997. "Complex bubble persistence in closed-end country funds," Journal of Economic Behavior & Organization, Elsevier, vol. 32(1), pages 19-37, January.
    4. Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number sm2012_047, December.
    5. Diba, Behzad T. & Grossman, Herschel I., 1988. "Rational inflationary bubbles," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 35-46, January.
    6. Stephan Schulmeister, 2007. "The Interaction Between the Aggregate Behaviour of Technical Trading Systems and Stock Price Dynamics," WIFO Working Papers 290, WIFO.
    7. Tolhurst, Tor N., "undated". "A Model-Free Bubble Detection Method: Application to the World Market for Superstar Wines," 2018 Annual Meeting, August 5-7, Washington, D.C. 274387, Agricultural and Applied Economics Association.
    8. Werner F. M. De Bondt & Richard H. Thaler, 1994. "Financial Decision-Making in Markets and Firms: A Behavioral Perspective," NBER Working Papers 4777, National Bureau of Economic Research, Inc.
    9. Hirshleifer, David & Teoh, Siew Hong, 2003. "Limited attention, information disclosure, and financial reporting," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 337-386, December.
    10. Robert Vigfusson & Simon van Norden, 1996. "Avoiding the Pitfalls: Can Regime-Switching Tests Detect Bubbles?," Staff Working Papers 96-11, Bank of Canada.
    11. Shareen Joshi & Jeffrey Parker & Mark A. Bedau, 1998. "Technical Trading Creates a Prisoner's Dilemma: Results from an Agent-Based Model," Research in Economics 98-12-115e, Santa Fe Institute.
    12. Robert A. Jarrow, 2021. "Asset Price Bubbles," Springer Finance, in: Continuous-Time Asset Pricing Theory, edition 2, chapter 0, pages 75-90, Springer.
    13. Po-Keng Cheng & Young Shin Kim, 2017. "Speculative bubbles and crashes： Fundamentalists and positive‐feedback trading," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1381370-138, January.
    14. Milo Bianchi & Philippe Jehiel, 2008. "Bubbles and crashes with partially sophisticated investors," Working Papers halshs-00586045, HAL.
    15. Simon van Norden & Huntley Schaller & ), 1995. "Speculative Behaviour, Regime-Switching, and Stock Market Crashes," Econometrics 9502003, University Library of Munich, Germany.
    16. Hüsler, A. & Sornette, D. & Hommes, C.H., 2013. "Super-exponential bubbles in lab experiments: Evidence for anchoring over-optimistic expectations on price," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 304-316.
    17. Kim, Bong Han & Min, Hong-Ghi, 2011. "Household lending, interest rates and housing price bubbles in Korea: Regime switching model and Kalman filter approach," Economic Modelling, Elsevier, vol. 28(3), pages 1415-1423, May.
    18. Stephan Schulmeister, 2009. "Trading Practices and Price Dynamics in Commodity Markets and the Stabilising Effects of a Transaction Tax," WIFO Studies, WIFO, number 34919.
    19. Bond, Derek & Gallagher, Emer & Ramsey, Elaine, 2012. "A preliminary investigation of northern Ireland's housing market dynamics," MPRA Paper 39806, University Library of Munich, Germany.
    20. Ahmed, Ehsan & Barkley Rosser, J. Jr. & Uppal, Jamshed Y., 1999. "Evidence of nonlinear speculative bubbles in pacific-rim stock markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(1), pages 21-36.

    More about this item

    JEL classification:

    • G - Financial Economics

    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:wpa:wuwpfi:9409001. 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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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: EconWPA The email address of this maintainer does not seem to be valid anymore. Please ask EconWPA to update the entry or send us the correct address (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    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.