The Ex Ante Likelihood of Bubbles

Alex Chinco ()
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Alex Chinco: Zicklin School of Business, Baruch College, New York, New York 10010

Management Science, 2023, vol. 69, issue 2, 1222-1244

Abstract: The limits of arbitrage explain how a speculative bubble is sustained; they do not explain how likely one is to occur. To do that, you need a theory about the thing that sporadically causes arbitrageur constraints to bind. I propose a first such theory, which is based on social interactions between speculators. The theory says that bubbles should be more likely in assets where increases in past returns make excited-speculators relatively more persuasive to their peers. I empirically verify this ex ante prediction about bubble likelihoods and show that it is robust to some ex post disagreement about bubble definitions.

Keywords: limits to arbitrage; speculative bubbles; social interactions (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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