Shakeouts and Market Crashes
30 Pages Posted: 12 Nov 2008
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Shakeouts and Market Crashes
Shakeouts and Market Crashes
Date Written: September 2003
Abstract
Stock-market crashes tend to follow run-ups in prices. These episodes look like bubbles that gradually inflate and then suddenly burst. We show that such bubbles can form in a Zeira-Rob type of model in which demand size is uncertain. Two conditions are sufficient for this to happen: A declining hazard rate in the prior distribution over market size and a convex cost of investment. For the period 1971-2001 we fit the model to the Telecom sector.
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