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Endogenous Rational Bubbles

George Waters

No 20111003, Working Paper Series from Illinois State University, Department of Economics

Abstract: Tests on simulated data from an asset pricing model with heterogeneous forecasts show excess variance in the price and ARCH effects in the returns, features not explained by the strong version of the efficient markets hypothesis. An evolutionary game theory dynamic describes how agents switch between a fundamental forecast, a rational bubble forecast and the reflective forecast, which is a weighted average of the former two. Conditions determining the frequency and duration of episodes where a significant fraction of agents adopt the rational bubble forecast leading to large deviations in the price-dividend ratio are discussed.

Keywords: return predictability; excess variance; ARCH; evolutionary game theory; rational bubble (search for similar items in EconPapers)
JEL-codes: C22 C73 D84 G12 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2011-10
New Economics Papers: this item is included in nep-cba and nep-for
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