Extrapolation and bubbles / by Nicholas Barberis, Robin Greenwood, Lawrence Jin, Andrei Shleifer Nicholas Barberis, Robin Greenwood, Lawrence Jin, Andrei Shleifer
Material type:
TextSeries: Journal of Financial Economics ; 129 (2)Publication details: Amsterdam Elsevier August 2018Description: Pages 203-227ISSN: - 0304-405X
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Abstract
We present an extrapolative model of bubbles. In the model, many investors form their demand for a risky asset by weighing two signals—an average of the asset’s past price changes and the asset’s degree of overvaluation—and “waver” over time in the relative weight they put on them. The model predicts that good news about fundamentals can trigger large price bubbles, that bubbles will be accompanied by high trading volume, and that volume increases with past asset returns. We present empirical evidence that bears on some of the model’s distinctive predictions.
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