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Optimism, pessimism and financial bubbles

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  • Bertrand Wigniolle

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

This paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank-dependent expected utility. This RDU assumption can be viewed as a transformation of probabilities depending on the pessimism/optimism of the agent. The results show that pessimism favors the existence of deterministic bubbles, when optimism may promote the existence of stochastic bubbles. Moreover, under pessimism, the RDU assumption may generate multiple bubbly equilibria. The RDU assumption also leads to new conditions ensuring the (absence of) Paretooptimality of the competitive equilibrium without bubbles. These conditions still govern the existence of bubbles.

Suggested Citation

  • Bertrand Wigniolle, 2014. "Optimism, pessimism and financial bubbles," Post-Print halshs-00974144, HAL.
    • Handle: RePEc:hal:journl:halshs-00974144
    DOI: 10.1016/j.jedc.2014.01.022
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00974144
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    Citations

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    Cited by:

    1. Lise Clain-Chamosset-Yvrard & Takashi Kamihigashi, 2015. "International Transmission of Bubble Crashes in a Two-Country Overlapping Generations," Discussion Paper Series DP2015-43, Research Institute for Economics & Business Administration, Kobe University.
    2. Wigniolle, B., 2014. "Optimism, pessimism and financial bubbles," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 188-208.
    3. Clain-Chamosset-Yvrard, Lise & Seegmuller, Thomas, 2015. "Rational bubbles and macroeconomic fluctuations: The (de-)stabilizing role of monetary policy," Mathematical Social Sciences, Elsevier, vol. 75(C), pages 1-15.
    4. Charles-Cadogan, G., 2021. "Market Instability, Investor Sentiment, And Probability Judgment Error in Index Option Prices," CRETA Online Discussion Paper Series 71, Centre for Research in Economic Theory and its Applications CRETA.
    5. Clain-Chamosset-Yvrard, Lise & Kamihigashi, Takashi, 2017. "International transmission of bubble crashes in a two-country overlapping generations model," Journal of Mathematical Economics, Elsevier, vol. 68(C), pages 115-126.
    6. Lise Clain-Chamosset-Yvrard & Thomas Seegmuller, 2013. "The Stabilizing Virtues of Fiscal vs. Monetary Policy on Endogenous Bubble Fluctuations," Working Papers halshs-00854536, HAL.
    7. Lise Claini-Chamosset-Yvrard & Takashi Kamihigashi, 2015. "International Transmission of Bubble Crashes: Stationary Sunspot Equilibria in a Two-Country Overlapping Generations Model," Discussion Paper Series DP2015-21, Research Institute for Economics & Business Administration, Kobe University.
    8. Godfrey Cadogan, 2014. "Chaos in a Large System of Decision‐Makers with Heterogeneous Beliefs with Application to Index Option Prices," Systems Research and Behavioral Science, Wiley Blackwell, vol. 31(4), pages 487-501, July.
    9. Eisei Ohtaki, 2023. "Climate change, financial intermediation, and monetary policy," Working Papers e179, Tokyo Center for Economic Research.
    10. Mathieu Boullot, 2017. "Secular Stagnation, Liquidity Trap and Rational Asset Price Bubbles," Working Papers halshs-01295012, HAL.

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    More about this item

    Keywords

    Rational bubbles; RDU preferences;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • G1 - Financial Economics - - General Financial Markets
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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