Bubbles and Crashes with Partially Sophisticated Investors

35 Pages Posted: 14 Mar 2011

See all articles by Milo Bianchi

Milo Bianchi

University of Toulouse 1 - Toulouse School of Economics (TSE)

Philippe Jehiel

University College London - Department of Economics; Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); Centre for Economic Policy Research (CEPR)

Date Written: December 7, 2010

Abstract

We analyze bubbles and crashes in a model in which some investors are partially sophisticated. While the expectations of such investors are endogenously determined in equilibrium, these are based on a coarse understanding of the market dynamics. We highlight how such investors may endogenously switch from euphoria to panic and how this may lead to equilibrium bubbles and crashes even in a purely speculative market in which information is complete and it is commonly understood that the bubble cannot grow forever. We also show how this setting can match stylized empirical facts, and we investigate whether bubbles may last longer when the share of fully rational traders increases.

Keywords: Speculative bubbles, crashes, bounded rationality

JEL Classification: D84, G12, C72

Suggested Citation

Bianchi, Milo and Jehiel, Philippe, Bubbles and Crashes with Partially Sophisticated Investors (December 7, 2010). Available at SSRN: https://ssrn.com/abstract=1785002 or http://dx.doi.org/10.2139/ssrn.1785002

Milo Bianchi (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Philippe Jehiel

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 4458 2873 (Phone)
+33 1 4458 2880 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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