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Classic rational bubbles and representativeness

Author

Listed:
  • Massimiliano Ferrara

    (University Mediterranea of Reggio Calabria)

  • Bruno Antonio Pansera

    (University Mediterranea of Reggio Calabria)

  • Francesco Strati

    (University Mediterranea of Reggio Calabria)

Abstract

The aim of this work is to describe a model of representative bubbles with infinitely lived agents that is accessible to a general audience. In particular, we shall compare this formalization of behavioral bubble dynamics with the classic rational one. The key role of the transversality condition for rational models will be clear, and we will discuss the necessity of its fulfillment when agents are not rational and arbitrageurs are faced with limited arbitrage possibilities. We shall analyze in detail what kind of nonrationality is taken into account and how it triggers bubbly dynamics. It will be plain that representative bubbles can explain the presence of bubbles even when rational models are not able to detect them.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:decfin:v:41:y:2018:i:1:d:10.1007_s10203-018-0205-4
    DOI: 10.1007/s10203-018-0205-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Efficient market hypothesis; Bubbles; Transversality condition; Diagnostic expectations;
    All these keywords.

    JEL classification:

    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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