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Endogenous Rational Bubbles

Author

Listed:
  • George A. Waters

    (Department of Economics, Illinois State University)

Abstract

Tests on simulated data from an asset pricing model with heterogeneous forecasts show excess variance in the price and ARCH effects in the returns, features not explained by the strong version of the efficient markets hypothesis. An evolutionary game theory dynamic describes how agents switch between a fundamental forecast, a rational bubble forecast and the reflective forecast, which is a weighted average of the former two. Conditions determining the frequency and duration of episodes where a significant fraction of agents adopt the rational bubble forecast leading to large deviations in the price-dividend ratio are discussed.

Suggested Citation

  • George A. Waters, 2011. "Endogenous Rational Bubbles," Working Paper Series 20111003, Illinois State University, Department of Economics.
    • Handle: RePEc:ils:wpaper:20111003
    as

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    File URL: http://economics.illinoisstate.edu/RePec/Papers/EndogenousRationalBubbles10-11.pdf
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    References listed on IDEAS

    as
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    13. Blake LeBaron, 2010. "Heterogeneous Gain Learning and Long Swings in Asset Prices," Working Papers 10, Brandeis University, Department of Economics and International Business School.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    return predictability; excess variance; ARCH; evolutionary game theory; rational bubble;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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