Kaizoji, Taisei (firstname.lastname@example.org) (2010): A Behavioral Model of Bubbles and Crashes.
Download (275Kb) | Preview
The aim of this paper is to provide one potential theoretical explanation for questions how asset bubbles come about, why it persists, and what caused it to burst. We propose a new model of bubbles and crashes. We divide the risky assets into two classes, the bubble asset and the non-bubble asset, and the risk-free asset. Investors are divided into two groups, the rational investors and the noise traders. The rational investors maximize their expected utility of their wealth in the next period. Noise traders maximize their random utility of binary choice: holding the bubble asset and holding the risk-free asst. We demonstrate that noise-traders’ herd behavior, which follows the behavior getting a majority, occurs when the number of noise-traders increases, and their herd behavior gives cause to a bubble, and their momentum trading prolongs bubble. However, rising stock price slows down as the noise-trader’s behavior approaches to a stationary state, so that the price momentum begins to decrease in the second half of bubble. We demonstrate that decreasing the price momentum lead to market crash.
|Item Type:||MPRA Paper|
|Original Title:||A Behavioral Model of Bubbles and Crashes|
|Keywords:||Bubble, chrash, noise traders, rational investors|
|Subjects:||G - Financial Economics > G0 - General > G01 - Financial Crises|
|Depositing User:||Taisei KAIZOJI|
|Date Deposited:||02. Feb 2010 03:16|
|Last Modified:||15. Feb 2013 12:05|
Abreu, D., and M. K. Brunnermeier, (2003), Bubbles and Crashes, Econometrica 71, 173-204.
Brennan, Michael, (2004), How Did It Happen?, Economic Notes 33, 3-22.
Brunnermeier, Markus and Stefan Nagel, (2004), Hedge funds and the technology bubble, Journal of Finance, 59 (5), 2013 - 2040.
DeBondt, W. F.M., and Richard Thaler, (1985), Does the stock market overreact? Journal of Finance 40, 793-808.
DeLong, J. B., Andrei Shleifer, Lawrence Summers and Robert Waldmann (1990), Noise trader risk in financial markets, Journal of Political Economy 98, 703-38.
Fama, Eugene and Kenneth French. (2002) “The Equity Premium,” Journal of Finance 57, 2, (2002) 637-659.
Gardiner, C.W., (1985) Handbook of Stochastic Methods, Springer-Verlag.
Hausman, Jerry A.and David A. Wise: A Conditional Probit Model for Qualitative Choice: Discrete Decisions Recognizing Interdependence and Heterogeneous Preferences, Econometrica, Vol. 46, No. 2 (Mar., 1978), pp. 403-426.
Jegadeesh, N., and S. Titman, 1993, “Returns to buying winners and selling losers: Implications for stock market efficiency,” Journal of Finance 48, 65-91.
Lintner, John (1969), The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets, The Journal of Financial and Quantitative Analysis, Vol. 4, No. 4., pp. 347-400.
Lee, Charles M. C., James Myers and Bhaskaran Swaminathan (1999), “What is the Intrinsic Value of the Dow?” Journal of Finance. 54, pp.1693–1741.
McFadden, Daniel, "Conditional Logit Analysis and Qualita- tive Choice ehavior," in Paul Zarembka (ed.), Frontiers in Econometrics (New York: Academic Press, 1974).
Mossin, J. (1966), Equilibrium in a Capital sset Market, Econometrica, Vol. 34, No. 4, pp. 768-783.
Haruvy, Ernan, E., Lahav, Y., and C. Noussair (2007), Traders’ Expectations in Asset Markets: Experimental Evidence, forthcoming in the American Economic Review.
Smith, V. L., Suchanek, G. L., and Williams, A. W., (1988), Bubbles, Crashes and Endogenous Expectations in Experimental Spot Asset Markets, Econometrica, 56(5), pp. 1119-1151.
Battalio, Robert and P. Shultz (2006), Options and the Bubble, Journal of Finance 59-5 2017-2102.
Ofek, Eli, and Matthew Richardson, 2003, DotCom Mania: The rise and fall of Internet stock prices, Journal of Finance 58, 1113-1137.
Robin Greenwood, R., and Stefan Nagel, (2008), Inexperienced Investors and Bubbles, Working Paper 14111, and Journal of Financial Economics (forthcoming).
Weidlich, W., and Haag, G. , 1983, Concepts and Models of a Quantitative Sociology, Springer-Verlag Berlin Heidelberg New York.