Diagnostic bubbles

Bordalo, Pedro

doi:10.1016/j.jfineco.2020.06.019

Diagnostic bubbles

2021-09-01

36

PRE

AI

Kwon, Spencer Yongwook

S

Shleifer, Andrei *

DOI：10.1016/j.jfineco.2020.06.019

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En 中文

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. (c) 2020 Elsevier B.V. All rights reserved.

Keyword:

Bubble

Speculation

Diagnostic expectations

Diagnostic bubbles

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