Coordinated bubbles and crashes

Huanhuan Zheng

Journal of Economic Dynamics and Control, 2020, vol. 120, issue C

Abstract: In a market with information friction, investors strategically consider the actions of others and evolutionarily switch between fundamental and technical strategies to maximize their payoffs. The collective actions of all investors exert feedback on asset price, which affects investors’ subsequent actions. We find that investors have the incentive to adopt fundamental strategy to restore market efficiency only if the mispricing is sufficiently large. When investors fail to coordinate on the fundamental strategy, market inefficiency increases, which blows the bubble. As market inefficiency grows, the coordination on fundamental strategy strengthens, which eventually bursts the bubble.

Keywords: Coordination games; Bubbles; Market efficiency (search for similar items in EconPapers)
JEL-codes: D52 D83 G12 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:120:y:2020:i:c:s0165188920301421

DOI: 10.1016/j.jedc.2020.103974

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