IDEAS home Printed from https://ideas.repec.org/a/bla/jfnres/v45y2022i1p5-16.html
   My bibliography  Save this article

Negative bubbles and the market for “dreams”: “Lemons” in the looking glass

Author

Listed:
  • Douglas R. Emery

Abstract

I extend Akerlof's adverse selection model, where uninformed participants withdraw from the market, and show that rather than collapse, “lemons” can, and often do, lead to a negative bubble. I then show that a mirror image of his model, where uninformed participants pursue “dreams” of becoming wealthy (e.g., trading in cryptocurrencies), can lead to a positive bubble that ultimately causes informed experts to withdraw when the supply of assets is finite. I also argue that, because prices of antiques, collectibles, and other objets d'art are typically based primarily on sentiment, fad, and/or fashion, such assets trade persistently in a positive bubble.

Suggested Citation

  • Douglas R. Emery, 2022. "Negative bubbles and the market for “dreams”: “Lemons” in the looking glass," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(1), pages 5-16, March.
    • Handle: RePEc:bla:jfnres:v:45:y:2022:i:1:p:5-16
    DOI: 10.1111/jfir.12262
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jfir.12262
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jfir.12262?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jeffrey Wurgler & Ekaterina Zhuravskaya, 2002. "Does Arbitrage Flatten Demand Curves for Stocks?," The Journal of Business, University of Chicago Press, vol. 75(4), pages 583-608, October.
    2. Behzad T. Diba & Herschel I. Grossman, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 697-700.
    3. Gadi Barlevy, 2007. "Economic theory and asset bubbles," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 31(Q III), pages 44-59.
    4. Lux, Thomas & Sornette, Didier, 2002. "On Rational Bubbles and Fat Tails," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 589-610, August.
    5. Peter M. DeMarzo & Ron Kaniel & Ilan Kremer, 2008. "Relative Wealth Concerns and Financial Bubbles," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 19-50, January.
    6. Stiglitz, Joseph E, 1990. "Symposium on Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 13-18, Spring.
    7. Adam, M C & Szafarz, A, 1992. "Speculative Bubbles and Financial Markets," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 626-640, October.
    8. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    9. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, April.
    10. De Long, J Bradford, et al, 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    11. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
    12. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    13. Dari-Mattiacci, Giuseppe & Onderstal, Sander & Parisi, Francesco, 2021. "Asymmetric solutions to asymmetric information problems," International Review of Law and Economics, Elsevier, vol. 66(C).
    14. Paul C. Tetlock, 2011. "All the News That's Fit to Reprint: Do Investors React to Stale Information?," The Review of Financial Studies, Society for Financial Studies, vol. 24(5), pages 1481-1512.
    15. Sanjeev Bhojraj & Robert J. Bloomfield & William B. Tayler, 2009. "Margin Trading, Overpricing, and Synchronization Risk," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 2059-2085, May.
    16. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
    17. Allen F. & Morris S. & Postlewaite A., 1993. "Finite Bubbles with Short Sale Constraints and Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 61(2), pages 206-229, December.
    18. Alok Kumar, 2009. "Who Gambles in the Stock Market?," Journal of Finance, American Finance Association, vol. 64(4), pages 1889-1933, August.
    19. Coval, Joshua & Stafford, Erik, 2007. "Asset fire sales (and purchases) in equity markets," Journal of Financial Economics, Elsevier, vol. 86(2), pages 479-512, November.
    20. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980.
    21. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-479, June.
    22. Shleifer, Andrei & Vishny, Robert W, 1997. "The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    23. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 73-92.
    24. Martin Dufwenberg & Tobias Lindqvist & Evan Moore, 2005. "Bubbles and Experience: An Experiment," American Economic Review, American Economic Association, vol. 95(5), pages 1731-1737, December.
    25. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339.
    26. Thaler, Richard H, 1988. "Anomalies: The Winner's Curse," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 191-202, Winter.
    27. Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2002. "Stocks are special too: an analysis of the equity lending market," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 241-269.
    28. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    29. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-896, July.
    30. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    31. Utpal Bhattacharya, 2008. "The Causes and Consequences of Recent Financial Market Bubbles: An Introduction," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 3-10, January.
    32. Abreu, Dilip & Brunnermeier, Markus K., 2002. "Synchronization risk and delayed arbitrage," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 341-360.
    33. Boehme, Rodney D. & Danielsen, Bartley R. & Sorescu, Sorin M., 2006. "Short-Sale Constraints, Differences of Opinion, and Overvaluation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(2), pages 455-487, June.
    34. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
    35. Mark Mitchell & Todd Pulvino & Erik Stafford, 2002. "Limited Arbitrage in Equity Markets," Journal of Finance, American Finance Association, vol. 57(2), pages 551-584, April.
    36. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002. "Breadth of ownership and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 171-205.
    37. repec:bla:jfinan:v:58:y:2003:i:3:p:1113-1138 is not listed on IDEAS
    38. Acharya, Viral & Naqvi, Hassan, 2019. "On reaching for yield and the coexistence of bubbles and negative bubbles," Journal of Financial Intermediation, Elsevier, vol. 38(C), pages 1-10.
    39. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
    40. Alok Kumar & Charles M.C. Lee, 2006. "Retail Investor Sentiment and Return Comovements," Journal of Finance, American Finance Association, vol. 61(5), pages 2451-2486, October.
    41. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-255, January.
    42. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(2), pages 323-336.
    43. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
    44. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    45. Eli Ofek & Matthew Richardson, 2003. "DotCom Mania: The Rise and Fall of Internet Stock Prices," Journal of Finance, American Finance Association, vol. 58(3), pages 1113-1137, June.
    46. Evans, George W, 1986. "A Test for Speculative Bubbles in the Sterling-Dollar Exchange Rate: 1981-84," American Economic Review, American Economic Association, vol. 76(4), pages 621-636, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wei Xiong, 2013. "Bubbles, Crises, and Heterogeneous Beliefs," NBER Working Papers 18905, National Bureau of Economic Research, Inc.
    2. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    3. Anna Scherbina & Bernd Schlusche, 2012. "Asset Bubbles: an Application to Residential Real Estate," European Financial Management, European Financial Management Association, vol. 18(3), pages 464-491, June.
    4. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    5. Hong, Harrison & Scheinkman, José & Xiong, Wei, 2008. "Advisors and asset prices: A model of the origins of bubbles," Journal of Financial Economics, Elsevier, vol. 89(2), pages 268-287, August.
    6. Zeng, Yeqin, 2016. "Institutional investors: Arbitrageurs or rational trend chasers," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 240-262.
    7. Tibor Neugebauer & Sascha Füllbrunn, 2013. "Deflating Bubbles in Experimental Asset Markets: Comparative Statics of Margin Regulations," LSF Research Working Paper Series 13-14, Luxembourg School of Finance, University of Luxembourg.
    8. Turan G. Bali & Andriy Bodnaruk & Anna Scherbina & Yi Tang, 2018. "Unusual News Flow and the Cross Section of Stock Returns," Management Science, INFORMS, vol. 64(9), pages 4137-4155, September.
    9. Nagel, Stefan, 2005. "Short sales, institutional investors and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 78(2), pages 277-309, November.
    10. Stijn Claessens & M. Ayhan Kose, 2013. "Financial Crises: Explanations, Types and Implications," CAMA Working Papers 2013-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    11. Li Lin & Didier Sornette, 2009. "Diagnostics of Rational Expectation Financial Bubbles with Stochastic Mean-Reverting Termination Times," Papers 0911.1921, arXiv.org.
    12. Nishiotis, George P. & Rompolis, Leonidas S., 2019. "Put-call parity violations and return predictability: Evidence from the 2008 short sale ban," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 276-297.
    13. Yao, Jing & Zheng, Zexin, 2021. "Costly arbitrage and skewness pricing: Evidence from first-day price limit reform in China," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    14. Harrison Hong & José Scheinkman & Wei Xiong, 2006. "Asset Float and Speculative Bubbles," Journal of Finance, American Finance Association, vol. 61(3), pages 1073-1117, June.
    15. Antonio Gargano & Juan Sotes-Paladino & Patrick Verwijmeren, 2022. "Out of Sync: Dispersed Short Selling and the Correction of Mispricing," Working Papers 108, Red Nacional de Investigadores en Economía (RedNIE).
    16. Pavlidis, Efthymios G. & Vasilopoulos, Kostas, 2020. "Speculative bubbles in segmented markets: Evidence from Chinese cross-listed stocks," Journal of International Money and Finance, Elsevier, vol. 109(C).
    17. Chang, Eric C. & Cheng, Joseph W. & Pinegar, J. Michael & Yu, Yinghui, 2012. "Short-sale constraints: Reductions in costs of capital or overvaluation? Evidence from Hong Kong," Pacific-Basin Finance Journal, Elsevier, vol. 20(3), pages 506-520.
    18. Au, Andrea S. & Doukas, John A. & Onayev, Zhan, 2009. "Daily short interest, idiosyncratic risk, and stock returns," Journal of Financial Markets, Elsevier, vol. 12(2), pages 290-316, May.
    19. David Hirshleife, 2015. "Behavioral Finance," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 133-159, December.
    20. ÅžimÅŸek, Alp, 2021. "The Macroeconomics of Financial Speculation," CEPR Discussion Papers 15733, C.E.P.R. Discussion Papers.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfnres:v:45:y:2022:i:1:p:5-16. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/sfaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.