Learning about Risk and Return: A Simple Model of Bubbles and Crashes
William Branch and
George Evans
University of Oregon Economics Department Working Papers from University of Oregon Economics Department
Abstract:
This paper demonstrates that an asset pricing model with least-squares learning can lead to bubbles and crashes as endogenous responses to the fundamentals driving asset prices. When agents are risk-averse they generate forecasts of the conditional variance of a stock's return. Recursive updating of the conditional variance and expected return implies two mechanisms through which learning impacts stock prices: occasional shocks may lead agents to lower their risk estimate and increase their expected return, thereby triggering a bubble; along a bubble path recursive estimates of risk will increase and crash the bubble.
Keywords: Risk; asset pricing; bubbles; adaptive learning. (search for similar items in EconPapers)
JEL-codes: D82 D83 G12 G14 (search for similar items in EconPapers)
References: Add references at CitEc
Citations:
Downloads: (external link)
http://economics.uoregon.edu/papers/UO-2008-1_Evans_Crash.pdf (application/pdf)
Related works:
Journal Article: Learning about Risk and Return: A Simple Model of Bubbles and Crashes (2011) 
Working Paper: Learning about Risk and Return: A Simple Model of Bubbles and Crashes (2010) 
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:ore:uoecwp:2008-1
Access Statistics for this paper
More papers in University of Oregon Economics Department Working Papers from University of Oregon Economics Department Contact information at EDIRC.
Bibliographic data for series maintained by Bill Harbaugh ().