Diagnostic bubbles
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 learning from prices and speculation (buying for resale). With diagnostic (but not w...
| Main Authors: | , , , |
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| Format: | Journal article |
| Language: | English |
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Elsevier
2020
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| _version_ | 1797071332164239360 |
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| author | Bordalo, P Gennaioli, N Kwon, S Shleifer, A |
| author_facet | Bordalo, P Gennaioli, N Kwon, S Shleifer, A |
| author_sort | Bordalo, P |
| collection | OXFORD |
| description | 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 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, then overshooting (the bubble), and finally a crash. With learning from prices, the model generates price extrapolation as a by-product of beliefs about fundamentals, lasting only as the bubble builds up. When investors speculate, even mild diagnostic distortions generate substantial bubbles.
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| first_indexed | 2024-03-06T22:51:40Z |
| format | Journal article |
| id | oxford-uuid:5eff5c78-40a4-4a99-a6fc-a063738ed315 |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-03-06T22:51:40Z |
| publishDate | 2020 |
| publisher | Elsevier |
| record_format | dspace |
| spelling | oxford-uuid:5eff5c78-40a4-4a99-a6fc-a063738ed3152022-03-26T17:44:09ZDiagnostic bubblesJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:5eff5c78-40a4-4a99-a6fc-a063738ed315EnglishSymplectic Elements at OxfordElsevier2020Bordalo, PGennaioli, NKwon, SShleifer, AWe 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 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, then overshooting (the bubble), and finally a crash. With learning from prices, the model generates price extrapolation as a by-product of beliefs about fundamentals, lasting only as the bubble builds up. When investors speculate, even mild diagnostic distortions generate substantial bubbles. |
| spellingShingle | Bordalo, P Gennaioli, N Kwon, S Shleifer, A Diagnostic bubbles |
| title | Diagnostic bubbles |
| title_full | Diagnostic bubbles |
| title_fullStr | Diagnostic bubbles |
| title_full_unstemmed | Diagnostic bubbles |
| title_short | Diagnostic bubbles |
| title_sort | diagnostic bubbles |
| work_keys_str_mv | AT bordalop diagnosticbubbles AT gennaiolin diagnosticbubbles AT kwons diagnosticbubbles AT shleifera diagnosticbubbles |