Econometrica: Jan 2003, Volume 71, Issue 1

Bubbles and Crashes

https://doi.org/10.1111/1468-0262.00393
p. 173-204

Dilip Abreu, Markus K. Brunnermeier

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 together with the individual incentive to 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.

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