Bubbles and Crashes

Dilip Abreu () and Markus Brunnermeier
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Dilip Abreu: Princeton University, Princeton, U.S.A.

Econometrica, 2003, vol. 71, issue 1, 173-204

Abstract: We present a model in which an asset bubble can persist despite the presence of rational arbitrageurs. The resilience of the bubble stems from the inability of arbitrageurs to temporarily coordinate their selling strategies. This "synchronization problem" together with the individual incentive to "time the market" results in the persistence of bubbles over a substantial period. Since the derived trading equilibrium is unique, our model rationalizes the existence of bubbles in a strong sense. The model also provides a natural setting in which news events, by enabling synchronization, can have a disproportionate impact relative to their intrinsic informational content. Copyright The Econometric Society 2003.

Date: 2003
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Working Paper: Bubbles and crashes (2002)
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