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Diagnostic Bubbles / Pedro Bordalo, Nicola Gennaioli, Spencer Yongwook Kwon, Andrei Shleifer.
- Format:
- Book
- Author/Creator:
- Bordalo, Pedro.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w25399.
- NBER working paper series no. w25399
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2018.
- Summary:
- We introduce diagnostic expectations into a standard setting of price formation in which investors learn about the fundamental value of an asset and trade it. We study the interaction of diagnostic expectations with two well-known mechanisms: learning from prices and speculation (buying for resale). With diagnostic (but not with rational) expectations, these mechanisms lead to price paths exhibiting three phases: initial underreaction, followed by overshooting (the bubble), and finally a crash. With learning from prices, the model generates price extrapolation as a byproduct of fast moving beliefs about fundamentals, which lasts only as the bubble builds up. When investors speculate, even mild diagnostic distortions generate substantial bubbles.
- Notes:
- Print version record
- December 2018.
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