Heteroscedasticity of deviations in market bubble moments – how the goods and bads lead to the ugly

Olivier Mesly and François-Éric Racicot ()

Applied Economics, 2018, vol. 50, issue 32, 3441-3463

Abstract: We conjecture that market bubbles may be the results of the interplay of Goods and Bads (toxic products) which develop through three interlocking moments – herding, swarming and stampeding, with deviations marked by heteroscedasticity. We use our stylized model of financial predation, the Consolidated Model of Financial Predation, and data we have accumulated through in-the-field eight-year research and the study of 30 years of U.S. market history in order to explore the foundations of market crises. We find that blind trust (or the positivity bias) and of the fear to miss out on an opportunity to enter/exit a market impacts the investors’ decisions to invest or retract. We show how markets are driven towards a make-or-break predatory dynamic that creates winners and losers due in part to weak regulations and identify a constant k that permeates market behaviours.

Date: 2018
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DOI: 10.1080/00036846.2017.1420902

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