Classic rational bubbles and representativeness

Massimiliano Ferrara (), Bruno Antonio Pansera () and Francesco Strati ()
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Bruno Antonio Pansera: University Mediterranea of Reggio Calabria
Francesco Strati: University Mediterranea of Reggio Calabria

Decisions in Economics and Finance, 2018, vol. 41, issue 1, No 2, 19-34

Abstract: Abstract The aim of this work is to describe a model of representative bubbles with infinitely lived agents that is accessible to a general audience. In particular, we shall compare this formalization of behavioral bubble dynamics with the classic rational one. The key role of the transversality condition for rational models will be clear, and we will discuss the necessity of its fulfillment when agents are not rational and arbitrageurs are faced with limited arbitrage possibilities. We shall analyze in detail what kind of nonrationality is taken into account and how it triggers bubbly dynamics. It will be plain that representative bubbles can explain the presence of bubbles even when rational models are not able to detect them.

Keywords: Efficient market hypothesis; Bubbles; Transversality condition; Diagnostic expectations (search for similar items in EconPapers)
JEL-codes: C61 D84 D91 G41 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s10203-018-0205-4

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