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INEFFICIENT INFORMATION AGGREGATION AS A SOURCE OF ASSET PRICE BUBBLES
Author(s) -
Friedman Daniel,
Aoki Masanao
Publication year - 1992
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.1992.tb00547.x
Subject(s) - economics , asset (computer security) , financial economics , monetary economics , microeconomics , computer science , computer security
This paper presents a new theory of bubbles, or discrepancies between the market clearing price and the fundamental value of an asset. In our setting, Bayesian traders, oriented towards long‐term gains, receive private information (‘news’) and also make inferences from noisy price signals. Price exhibits higher variance than fundamental value (the latter defined as fully‐aggregated expected value) especially when news is informative but infrequent. The corresponding bubbles are self‐limiting but may exhibit momentum and overshooting. A parametric example, involving the exponential/gamma conjugate families, is provided. We don't have any penetrating explanations of yesterday's stock market, but we certainly believe that stocks do not fall 86½ points for nothing. The general case for a drop in the market after its recent record highs is clear enough. The Fed…,… the tax bill. None of this, though, was any different on Thursday than it was with the market at its peak six sessions ago. News…and rumors yesterday…were certainly negative but scarcely dramatic. Some market pros believe this kind of a drop is merely the market catching up with what it already knew. We doubt it. Our hunch is that something changed between Wednesday and Thursday, and that eventually we'll learn what it was ( Wall Street Journal Editorial, Friday, September 12, 1986).