Informational Overshooting, Booms, and Crashes

Posted: 11 Apr 2001  

Joseph Zeira

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR); LUISS Guido Carli, DPTEA

Abstract

This paper offers an informational explanation to stock markets' booms and crashes. This explanation builds on the idea of 'informational overshooting': if market fundamentals change for an unknown period of time, prices experience a boom, which ends in a crash, due to informational dynamics. The paper then shows that 'informational overshooting' occurs when the market expands to a new capacity, which is unknown until it is reached. The paper presents two examples for such expansions, one due to increased productivity and one due to entry of new investors to the stock market. One implication is that financial liberalizations tend to be followed by booms and crashes.

Keywords: Rational expectations, missing information, booms and crashes, financial liberalization

Suggested Citation

Zeira, Joseph, Informational Overshooting, Booms, and Crashes. Journal of Monetary Economics, Vol. 43, February 1999. Available at SSRN: https://ssrn.com/abstract=266488

Joseph Zeira (Contact Author)

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem 91905, IL 91905
Israel
+972 2 588 3256 (Phone)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

LUISS Guido Carli, DPTEA ( email )

viale Pola 12
Roma, Roma 00198
Italy

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