Informational Efficiency and Endogenous Rational Bubbles

George Waters

A chapter in Uncertainty, Expectations and Asset Price Dynamics, 2018, pp 149-172 from Springer

Abstract: Abstract In a model where rational bubbles form and collapse endogenously, properly specified tests of return predictability have little power to reject deviations from the efficient markets model. A weighted replicator dynamic describes how agents switch between a forecast based on fundamentals, a rational bubble forecast, and a weighted average of the two. A significant portion of the population may adopt the rational bubble forecast, which is inconsistent with the efficient markets model but satisfies informational efficiency. Tests on simulated data show excess variance in the price and unpredictable returns.

JEL-codes: C22 C73 D84 G12 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/978-3-319-98714-9_7

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