IDEAS home Printed from https://ideas.repec.org/a/gam/jmathe/v5y2017i4p64-d119312.html
   My bibliography  Save this article

On the Inception of Financial Representative Bubbles

Author

Listed:
  • Massimiliano Ferrara

    (Department of Law and Economics, University Mediterranea of Reggio Calabria, Via dei Bianchi 2, 89127 Reggio Calabria, Italy
    Decisions Lab, Department of Law and Economics, University Mediterranea of Reggio Calabria, Via dei Bianchi 2, 89127 Reggio Calabria, Italy
    Invernizzi Center for Research on Innovation, Organization, Strategy and Entrepreneurship, Department of Management and Technology, Bocconi University, Via Sarfatti 25, 20136 Milano, Italy
    These authors contributed equally to this work.)

  • Bruno A. Pansera

    (Department of Law and Economics, University Mediterranea of Reggio Calabria, Via dei Bianchi 2, 89127 Reggio Calabria, Italy
    Decisions Lab, Department of Law and Economics, University Mediterranea of Reggio Calabria, Via dei Bianchi 2, 89127 Reggio Calabria, Italy
    These authors contributed equally to this work.)

  • Francesco Strati

    (Department of Law and Economics, University Mediterranea of Reggio Calabria, Via dei Bianchi 2, 89127 Reggio Calabria, Italy
    Decisions Lab, Department of Law and Economics, University Mediterranea of Reggio Calabria, Via dei Bianchi 2, 89127 Reggio Calabria, Italy
    These authors contributed equally to this work.)

Abstract

In this work, we aim to formalize the inception of representative bubbles giving the condition under which they may arise. We will find that representative bubbles may start at any time, depending on the definition of a behavioral component. This result is at odds with the theory of classic rational bubbles, which are those models that rely on the fulfillment of the transversality condition by which a bubble in a financial asset can arise just at its first trade. This means that a classic rational bubble (differently from our model) cannot follow a cycle since if a bubble exists, it will burst by definition and never arise again.

Suggested Citation

  • Massimiliano Ferrara & Bruno A. Pansera & Francesco Strati, 2017. "On the Inception of Financial Representative Bubbles," Mathematics, MDPI, vol. 5(4), pages 1-9, November.
    • Handle: RePEc:gam:jmathe:v:5:y:2017:i:4:p:64-:d:119312
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7390/5/4/64/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7390/5/4/64/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Nicola Gennaioli & Yueran Ma & Andrei Shleifer, 2016. "Expectations and Investment," NBER Macroeconomics Annual, University of Chicago Press, vol. 30(1), pages 379-431.
    2. Aziz Issaka & Indranil SenGupta, 2017. "Analysis of variance based instruments for Ornstein–Uhlenbeck type models: swap and price index," Annals of Finance, Springer, vol. 13(4), pages 401-434, November.
    3. Gennaioli, Nicola & Shleifer, Andrei & Vishny, Robert, 2012. "Neglected risks, financial innovation, and financial fragility," Journal of Financial Economics, Elsevier, vol. 104(3), pages 452-468.
    4. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    5. Nicola Gennaioli & Andrei Shleifer, 2010. "What Comes to Mind," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(4), pages 1399-1433.
    6. Stefano Giglio & Matteo Maggiori & Johannes Stroebel, 2016. "No‐Bubble Condition: Model‐Free Tests in Housing Markets," Econometrica, Econometric Society, vol. 84, pages 1047-1091, May.
    7. Robin Greenwood & Andrei Shleifer, 2014. "Expectations of Returns and Expected Returns," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 714-746.
    8. 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.
    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. Massimiliano Ferrara & Bruno Antonio Pansera & Francesco Strati, 2018. "Classic rational bubbles and representativeness," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 41(1), pages 19-34, May.
    2. Bordalo, Pedro & Gennaioli, Nicola & Kwon, Spencer Yongwook & Shleifer, Andrei, 2021. "Diagnostic bubbles," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1060-1077.
    3. John Manuel Barrios & Yael V. Hochberg, 2020. "Risk Perception Through the Lens of Politics in the Time of the COVID-19 Pandemic," Working Papers 2020-32, Becker Friedman Institute for Research In Economics.
    4. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.
    5. Robin Greenwood & Samuel G. Hanson & Lawrence J. Jin, 2019. "Reflexivity in Credit Markets," NBER Working Papers 25747, National Bureau of Economic Research, Inc.
    6. Blot, Christophe & Hubert, Paul & Labondance, Fabien, 2024. "The asymmetric effects of monetary policy on stock price bubbles," European Economic Review, Elsevier, vol. 168(C).
    7. Tolhurst, Tor N., 2018. "A Model-Free Bubble Detection Method: Application to the World Market for Superstar Wines," 2018 Annual Meeting, August 5-7, Washington, D.C. 274387, Agricultural and Applied Economics Association.
    8. Chernenko, Sergey & Hanson, Samuel G. & Sunderam, Adi, 2016. "Who neglects risk? Investor experience and the credit boom," Journal of Financial Economics, Elsevier, vol. 122(2), pages 248-269.
    9. Markus Knell & Helmut Stix, 2019. "How Peer Groups Influence Economic Perceptions," Working Papers 227, Oesterreichische Nationalbank (Austrian Central Bank).
    10. Johannes Stroebel, 2016. "EconomicDynamics Interview: Johannes Stroebel on real estate dynamics," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 17(2), November.
    11. Saki Bigio & Eduardo Zilberman, 2020. "Speculation-Driven Business Cycles," Working Papers Central Bank of Chile 865, Central Bank of Chile.
    12. Dmitry Kulikov, 2012. "Testing for Rational Speculative Bubbles on the Estonian Stock Market," Research in Economics and Business: Central and Eastern Europe, Tallinn School of Economics and Business Administration, Tallinn University of Technology, vol. 4(1).
    13. Park, Hyun Woong & Bernardin, Thomas, 2018. "Liquidity, bank runs, and fire sales under local thinking," The North American Journal of Economics and Finance, Elsevier, vol. 46(C), pages 89-102.
    14. Barberis, Nicholas & Greenwood, Robin & Jin, Lawrence & Shleifer, Andrei, 2018. "Extrapolation and bubbles," Journal of Financial Economics, Elsevier, vol. 129(2), pages 203-227.
    15. Schmeling, Maik & Schrimpf, Andreas & Steffensen, Sigurd A.M., 2022. "Monetary policy expectation errors," Journal of Financial Economics, Elsevier, vol. 146(3), pages 841-858.
    16. An, Suwei, 2023. "Essays on incentive contracts, M&As, and firm risk," Other publications TiSEM dd97d2f5-1c9d-47c5-ba62-f, Tilburg University, School of Economics and Management.
    17. Briggs, Joseph & Cesarini, David & Lindqvist, Erik & Östling, Robert, 2021. "Windfall gains and stock market participation," Journal of Financial Economics, Elsevier, vol. 139(1), pages 57-83.
    18. ter Ellen, Saskia & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2019. "Agreeing on disagreement: Heterogeneity or uncertainty?," Journal of Financial Markets, Elsevier, vol. 44(C), pages 17-30.
    19. Jean‐Philippe Bouchaud & Philipp Krüger & Augustin Landier & David Thesmar, 2019. "Sticky Expectations and the Profitability Anomaly," Journal of Finance, American Finance Association, vol. 74(2), pages 639-674, April.
    20. Stanislav Anatolyev & Sergei Seleznev & Veronika Selezneva, 2021. "How does the financial market update beliefs about the real economy? Evidence from the oil market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(7), pages 938-961, November.

    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:gam:jmathe:v:5:y:2017:i:4:p:64-:d:119312. 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: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    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.