Technology shocks and financial bubbles

Haim Kedar-Levy ()
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Haim Kedar-Levy: Ben-Gurion University, Postal: POB 653, Beer-Sheva 84105, Isreal, http://cmsprod.bgu.ac.il/Eng/som/management/Staff/Academic/Haim_Levy.htm

Journal of Financial Transformation, 2003, vol. 7, 53-62

Abstract: Bubbles are defined in this paper as a temporary period of asset mispricing during which prices diverge from Rational Expectations Equilibrium (REE) for a period that is too long to be justified by random mispricing about a fixed mean rate of return. We solve for the market price of the risky asset based on marginal supply and demand functions for quantities of shares, where the total issue is fixed. The marginal supply/demand functions are derived from the optimal asset allocation problem of rational agents who have HARA type utility functions with different risk aversion coefficients. It is sufficient to assume incomplete information in this model in order to obtain bubbles in a dynamic asset pricing setting; we maintain agents' rationality and homogeneous information. It appears that shares of new-technology companies are prone to exhibit bubbles more than old technology shares since investors lack an observable fundamental benchmark. As long as that benchmark is unavailable, bubbles might emerge if less risk-averse agents dominate the market.

Keywords: Financial bubbles; Rational Expectations Equilibrium; market efficiency; asset pricing (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1300

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