Open AccessRational speculative bubbles: A critical view
Author(s) -
Ognjen Radonjić
Publication year - 2007
Publication title -
economic annals/ekonomski anali
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.148
H-Index - 12
eISSN - 1820-7375
pISSN - 0013-3264
DOI - 10.2298/eka0775073r
Subject(s) - economics , asset (computer security) , rational expectations , rationality , rational planning model , realization (probability) , value (mathematics) , homogeneous , bubble , economic bubble , microeconomics , positive economics , financial economics , econometrics , monetary economics , computer science , mathematics , political science , law , statistics , computer security , management , combinatorics , parallel computing , machine learning
According to the theory of rational bubbles, the bubble is present whenever asset prices progressively diverge from their fundamental value, which occurs because agents expect that asset prices will continue to grow exponentially (self-fulfilling prophecies) far in the future and consistently, which promises the realization of ever larger capital gains. In our opinion, the basic shortcoming of this theory refers to the assumption that all market agents are perfectly informed and rational and, accordingly, form homogeneous expectations. The model does not explain decision-making processes or expectation formation, nor does it detect potential psychological and institutional factors that might significantly influence decision making processes and market participants’ reactions to news. Since assumptions of the model critically determine its validity, we conclude that comprehensiveness of the rational bubble model is, to put it mildly, limited