When investors have differences of opinion about the payoffs of a stock, Harrison and Kreps (1978) demonstrate the existence of a speculative bubble in the stock price, that is, the stock price can exceed the valuation of the most optimistic investor. A crucial condition that supports this result in their model is that investors are not allowed to short sell the stock. This paper demonstrates t...

The concepts of ‘knowledge’ and ‘rationality’ are of central importance to fields of science that are interested in human behavior and learning, such as artificial intelligence, economics, and psychology. The similarity between artificial intelligence and economics both are concerned with intelligent thought, rational behavior, and the use and acquisition of knowledge has led to the use of econ...

These notes consider Abreu and Brunnermeier’s (2003) paper on the failure of rational arbitrage in asset markets. Recall that the “no-trade” theorem states that speculative bubbles cannot exist in a world with only rational traders even if there is asymmetric information, so long as these traders share a common prior. Believers in the efficient market hypothesis argue that even if there are als...

The aim of this paper is to analyse the effect introduced in the dynamics of a financial market when agents anticipate the occurrence of a correlation breakdown.What emerges is that correlation breakdowns can act both as a consequence and as a triggering factor in the emergence of financial crises rational bubbles. We propose a market with two kinds of agents: speculators and rational investors...

Home prices have surged in major Chinese cities, leading to concerns of asset price bubbles and housing affordability. The policy of home purchase restrictions (HPR) has been one of China’s harshest housing market interventions to squeeze out speculative demand and dampen the soaring home prices. Beijing was the first city to implement the HPR. Employing the regression discontinuity design tech...

This paper tests for speculative bubbles in the medieval English property market based on a unique hand-collected dataset from feet of fines spanning fourteenth and fifteenth centuries. We focus asset types where there are sufficiently large numbers transactions each year to make long reliable run information, we transform this into annual time-series prices. employ regime switching model that ...

We propose a non linear Langevin equation as a model for stock market fluctuations and crashes. This equation is based on an identification of the different processes influencing the demand and supply, and their mathematical transcription. We emphasize the importance of feedback effects of price variations onto themselves. Risk aversion, in particular, leads to an ‘up-down’ symmetry breaking te...

Many authors have contributed to the idea that financial markets are dynamically unstable. Much of this line of thinking suggests that bubbles and crashes will be a generic feature of most any speculative market, and that removing them would be difficult, if not impossible. Hyman Minsky is probably the one of the earlier contributors to this area, and recently his work has been looked at with n...

Forward exchange rate unbiasedness is rejected in tests from the current floating exchange rate era. This paper surveys advances in this area since the publication of Hodrick's (1987) survey. It documents that the change in the future exchange rate is generally negatively related to the forward discount. Properties of the expected forward forecast error are reviewed. Issues such as the relation...