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Bubbles and Crashes with Partially Sophisticated Investors

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  • Milo Bianchi
  • Philippe Jehiel

Abstract

We consider a purely speculative market with finite horizon and complete information. We introduce partially sophisticated investors, who know the average buy and sell strategies of other traders, but lack a precise understanding of how these strategies depend on the history of trade. In this setting, it is common knowledge that the market is overvalued and bound to crash, but agents hold different expectations about the date of the crash. We define conditions for the existence of equilibrium bubbles and crashes, characterize their structure, and show how bubbles may last longer when the amount of fully rational traders increases.
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  • Milo Bianchi & Philippe Jehiel, 2010. "Bubbles and Crashes with Partially Sophisticated Investors," Levine's Working Paper Archive 122247000000002180, David K. Levine.
    • Handle: RePEc:cla:levarc:122247000000002180
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    Cited by:

    1. Milo Bianchi & Philippe Jehiel, 2008. "Bubbles and crashes with partially sophisticated investors," PSE Working Papers halshs-00586045, HAL.
    2. Jakub Steiner & Colin Stewart, 2012. "Price Distortions in High-Frequency Markets," Discussion Papers 1549, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Antler, Yair, 2023. "Multilevel marketing: pyramid-shaped schemes or exploitative scams?," Theoretical Economics, Econometric Society, vol. 18(2), May.
    4. Steiner, Jakub & Stewart, Colin, 2015. "Price distortions under coarse reasoning with frequent trade," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 574-595.
    5. Antler, Yair, 2018. "Multilevel Marketing: Pyramid-Shaped Schemes or Exploitative Scams?," CEPR Discussion Papers 13054, C.E.P.R. Discussion Papers.
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