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Speculative Bubbles, Heterogeneopus Beliefs, and Learning

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  • Jan Werner

    (University of Minnesota)

Abstract

This paper develops a general theory of speculative bubbles and speculative trade in dynamic asset markets with short sales restrictions when agents have heterogeneous beliefs and are risk neutral. Speculative bubble arises when the price of an asset exceeds every trader's valuation measured by her willingness to pay if obliged to hold the asset forever. Speculative bubble indicates speculative trade - whoever holds the asset intends to sell it at a later date. We identify a sufficient condition on agents' heterogeneous beliefs for speculative bubbles in equilibrium. Our main focus is on heterogeneous beliefs arising from updating different prior beliefs in Bayesian model of learning. The sufficient condition for beliefs in Bayesian model is that no single prior dominates other agents' priors in the sense of monotone likelihood ratio order. We study asymptotic properties of speculative bubbles in light of merging of conditional beliefs and consistency of priors.

Suggested Citation

  • Jan Werner, 2018. "Speculative Bubbles, Heterogeneopus Beliefs, and Learning," 2018 Meeting Papers 1216, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:1216
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    References listed on IDEAS

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    1. Darwich, A. R., 2001. "About the absolute continuity and orthogonality for two probability measures," Statistics & Probability Letters, Elsevier, vol. 52(1), pages 1-8, March.
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    3. 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.
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    5. LeRoy,Stephen F. & Werner,Jan, 2014. "Principles of Financial Economics," Cambridge Books, Cambridge University Press, number 9781107024120, October.
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    Cited by:

    1. Klishchuk, Bogdan, 2019. "Speculative Trade and Market Newcomers," Rationality and Competition Discussion Paper Series 175, CRC TRR 190 Rationality and Competition.

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