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Bubbles and Crashes
Author(s) -
Abreu Dilip,
Brunnermeier Markus K.
Publication year - 2003
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.1111/1468-0262.00393
Subject(s) - arbitrage , economic bubble , economics , incentive , asset (computer security) , limits to arbitrage , synchronization (alternating current) , monetary economics , psychological resilience , persistence (discontinuity) , resilience (materials science) , microeconomics , rational expectations , financial economics , business , econometrics , computer security , computer science , engineering , psychology , computer network , channel (broadcasting) , physics , geotechnical engineering , psychotherapist , thermodynamics
We present a model in which an asset bubble can persist despite the presence of rational arbitrageurs. The resilience of the bubble stems from the inability of arbitrageurs to temporarily coordinate their selling strategies. This synchronization problem together with the individual incentive to time the market results in the persistence of bubbles over a substantial period. Since the derived trading equilibrium is unique, our model rationalizes the existence of bubbles in a strong sense. The model also provides a natural setting in which news events, by enabling synchronization, can have a disproportionate impact relative to their intrinsic informational content.