Abstract
Bubbles refer to asset prices that exceed an asset’s fundamental value because current owners believe they can resell the asset at an even higher price. There are four main strands of models: (i) all investors have rational expectations and identical information, (ii) investors are asymmetrically informed and bubbles can emerge because their existence need not be commonly known, (iii) rational traders interact with behavioural traders and bubbles persist since limits to arbitrage prevent rational investors from eradicating the price impact of behavioural traders, (iv) investors hold heterogeneous beliefs, potentially due to psychological biases, and agree to disagree about the fundamental value.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Bibliography
Abreu, D., and M.K. Brunnermeier. 2002. Synchronization risk and delayed arbitrage. Journal of Financial Economics 66: 341–360.
Abreu, D., and M.K. Brunnermeier. 2003. Bubbles and crashes. Econometrica 71: 173–204.
Allen, F., and G. Gorton. 1993. Churning bubbles. Review of Economic Studies 60: 813–836.
Allen, F., S. Morris, and A. Postlewaite. 1993. Finite bubbles with short sale constraints and asymmetric information. Journal of Economic Theory 61: 206–229.
Blanchard, O.J., and M.W. Watson. 1982. Bubbles, rational expectations, and financial markets. In Crisis in the economic and financial structure, ed. P. Wachtel. Lexington: Lexington.
Brunnermeier, M.K. 2001. Asset pricing under asymmetric information: Bubbles, crashes, technical analysis and herding. Oxford: Oxford University Press.
Brunnermeier, M.K., and S. Nagel. 2004. Hedge funds and the technology bubble. Journal of Finance 59: 2013–2040.
Campbell, J.Y., and R.J. Shiller. 1988. The dividend-price ratio and expectations of future dividends and discount factors. Review of Financial Studies 1: 195–228.
DeLong, J.B., A. Shleifer, L.H. Summers, and R.J. Waldmann. 1990. Noise trader risk in financial markets. Journal of Political Economy 98: 703–738.
Diba, B.T., and H.I. Grossman. 1988. The theory of rational bubbles in stock prices. Economic Journal 98: 746–754.
Evans, G.W. 1991. Pitfalls in testing for explosive bubbles in asset prices. American Economic Review 81: 922–930.
Flood, R.P., and P.M. Garber. 1980. Market fundamentals versus price-level bubbles: The first tests. Journal of Political Economy 88: 745–770.
Harrison, J.M., and D. Kreps. 1978. Speculative investor behavior in a stock market with heterogeneous expectations. Quarterly Journal of Economics 89: 323–336.
Kindleberger, C.P. 2005. Manias, panics and crashes: A history of financial crises. 5th ed. New york: Wiley.
Kleidon, A.W. 1986. Variance bounds tests and stock price valuation models. Journal of Political Economy 94: 953–1001.
Lei, V., C.N. Noussair, and C.R. Plott. 2001. Nonspeculative bubbles in experimental asset markets: Lack of common knowledge of rationality vs. actual irrationality. Econometrica 69: 831–859.
LeRoy, S.F., and R.D. Porter. 1981. The present value relation: Tests based on implied variance bounds. Econometrica 64: 555–574.
McKelvey, R.D., and T.R. Palfrey. 1992. An experimental study of the centipede game. Econometrica 60: 803–836.
Miller, E.M. 1977. Risk, uncertainty, and divergence of opinion. Journal of Finance 32: 1151–1168.
Ofek, E., and M. Richardson. 2003. DotCom mania: The rise and fall of Internet stocks, Working paper no. FIN-01-037 58(3), 1113–1138. New York University, Stern School.
Rosenthal, R. 1981. Games of perfect information, predatory pricing, and the chain- store paradox. Journal of Economic Theory 25: 92–100.
Scheinkman, J., and W. Xiong. 2003. Overconfidence and speculative bubbles. Journal of Political Economy 111: 1183–1219.
Shiller, R.J. 1981. Do stock prices move too much to be justified by subsequent changes in dividends? American Economic Review 71: 421–436.
Shleifer, A., and R.W. Vishny. 1997. The limits of arbitrage. Journal of Finance 52: 35–55.
Smith, V.L., G.L. Suchanek, and A.W. Williams. 1988. Bubbles, crashes, and endogenous expectations in experimental spot asset markets. Econometrica 56: 1119–1151.
Temin, P., and H.-J. Voth. 2004. Riding the south sea bubble. American Economic Review 94: 1654–1668.
Tirole, J. 1982. On the possibility of speculation under rational expectations. Econometrica 50: 1163–1182.
West, K.D. 1987. A specification test for speculative bubbles. Quarterly Journal of Economics 102: 553–580.
Author information
Authors and Affiliations
Editor information
Copyright information
© 2018 Macmillan Publishers Ltd.
About this entry
Cite this entry
Brunnermeier, M.K. (2018). Bubbles. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_44
Download citation
DOI: https://doi.org/10.1057/978-1-349-95189-5_44
Published:
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-95188-8
Online ISBN: 978-1-349-95189-5
eBook Packages: Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences