Bubbles and Crashes with Partially Sophisticated Investors
Bianchi, Milo; Jehiel, Philippe (2010), Bubbles and Crashes with Partially Sophisticated Investors. https://basepub.dauphine.fr/handle/123456789/5361
TypeDocument de travail / Working paper
Series titlePSE Working Papers
MetadataShow full item record
Abstract (EN)We analyze bubbles and crashes in a model in which some investors are partially sophisticated. While the expectations of such investors are endogenously determined in equilibrium, these are based on a coarse understanding of the market dynamics. We highlight how such investors may endogenously switch from euphoria to panic and how this may lead to equilibrium bubbles and crashes even in a purely speculative market in which information is complete and it is commonly understood that the bubble cannot grow forever. We also show how this setting can match stylized empirical facts, and we investigate whether bubbles may last longer when the share of fully rational traders increases.
Subjects / KeywordsSpeculative bubbles; crashes; bounded rationality
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