Related papers: Rational Bubbles: A Clarification
We discuss - in what is intended to be a pedagogical fashion - a criterion, which is a lower bound on a certain ratio, for when a stock (or a similar instrument) is not a good investment in the long term, which can happen even if the…
The bubble is a controversial and important issue. Many methods which based on the rational expectation have been proposed to detect the bubble. However, for some developing countries, epically China, the asset markets are so young that for…
In this paper, we address one of the main puzzles in finance observed in the stock market by proponents of behavioral finance: the stock predictability puzzle. We offer a statistical model within the context of rational finance which can be…
We introduce a simple generalization of rational bubble models which removes the fundamental problem discovered by [Lux and Sornette, 1999] that the distribution of returns is a power law with exponent less than 1, in contradiction with…
We extend the model of rational bubbles of Blanchard and of Blanchard and Watson to arbitrary dimensions d: a number d of market time series are made linearly interdependent via d times d stochastic coupling coefficients. We first show that…
In this paper we address three main objections of behavioral finance to the theory of rational finance, considered as anomalies the theory of rational finance cannot explain: Predictability of asset returns, The Equity Premium, (The…
Plausible reasoning concerns situations whose inherent lack of precision is not quantified; that is, there are no degrees or levels of precision, and hence no use of numbers like probabilities. A hopefully comprehensive set of principles…
We consider a simple stochastic differential equation for modeling bubbles in social context. A prime example is bubbles in asset pricing, but similar mechanisms may control a range of social phenomena driven by psychological factors (for…
Rational pure bubble models feature multiple (and often a continuum of) equilibria, which makes model predictions and policy analyses non-robust. We show that when the interest rate in the fundamental equilibrium is below the economic…
Establishing unambiguously the existence of speculative bubbles is an on-going controversy complicated by the need of defining a model of fundamental prices. Here, we present a novel empirical method which bypasses all the difficulties of…
This paper introduces a new approach for bubble detection based on mixed causal and noncausal autoregressive processes and their tail process representation during an explosive episode. Departing from traditional definitions of bubbles as…
Recently research on bubble and its burst attract much interest of researchers in various field such as economics and physics. Economists have been regarding bubble as a disorder in prices. However, this research strategy has overlooked an…
We seek to deepen understanding of the micro-foundations of institutionalization while contributing to a sociological theory of markets by investigating the puzzle of price bubbles in financial markets. We find that such markets, despite…
In physics the value of a theory is measured by its agreement with experimental data. But how should the physics community gauge the value of an emerging theory that has not been tested experimentally as of yet? With no reality check, a…
Tirole (1985) studied an overlapping generations model with capital accumulation and showed that the emergence of asset bubbles solves the capital over-accumulation problem. His Proposition 1(c) claims that if the dividend growth rate is…
The 2015 Nobel Prize in Economic Sciences was awarded to Eugene Fama, Lars Peter Hansen and Robert Shiller for their contributions to the empirical analysis of asset prices. Eugene Fama [1] is an advocate of the efficient market hypothesis.…
Large variations in stock prices happen with sufficient frequency to raise doubts about existing models, which all fail to account for non-Gaussian statistics. We construct simple models of a stock market, and argue that the large…
Rational decision making in its linguistic description means making logical decisions. In essence, a rational agent optimally processes all relevant information to achieve its goal. Rationality has two elements and these are the use of…
This paper presents a plausible reasoning system to illustrate some broad issues in knowledge representation: dualities between different reasoning forms, the difficulty of unifying complementary reasoning styles, and the approximate nature…
Rationality has been an intriguing topic for several decades. Even the scope of definition of rationality across different subjects varies. Several theories (e.g., game theory) initially evolved on the basis that agents (e.g., humans) are…