Conditions for bubbles to arise under heterogeneous beliefs

Seunghyun Lee and Hyungbin Park

Quantitative Finance, 2022, vol. 22, issue 3, 409-421

Abstract: This study examines the price bubble of a continuous-time asset traded in a market with heterogeneous investors. Our market constitutes a positive mean-reverting asset and two groups of investors with different beliefs about the model parameters. We provide an equivalent condition for the formation of bubbles and show that price bubbles may not form, although there are heterogeneous beliefs. This suggests that investor heterogeneity does not always result in a bubble, and additional analysis on the drift term is required. Additionally, when investors agree on the volatility, the explicit bubble size can be calculated through a differential equation argument. Analysis of this bubble formula clearly justifies that our model is indeed realistic.

Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/14697688.2021.1990376 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:22:y:2022:i:3:p:409-421

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1080/14697688.2021.1990376

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().