Multiple Rational Bubbles

47 Pages Posted: 31 Oct 2023 Last revised: 20 Jun 2024

See all articles by Jungsuk Han

Jungsuk Han

Seoul National University - College of Business Administration; Finance Theory Group (FTG)

Yenan Wang

Amsterdam Business School, University of Amsterdam

Date Written: October 2, 2023

Abstract

We explore multiple rational bubbles with varied levels of confidence. Post-bursting, aggregate bubble size contracts, while surviving bubbles gain value. Greater confidence (probability of continuation) in a bubble increases its size, expanding aggregate bubble size but deflating others. Fragile bubble assets, collectively, might rival a stable one due to diversification benefits. The welfare loss from bursting is small because the growth of surviving bubbles compensates for the lost value. Our stationary model offers a theoretical upper bound on aggregate bubble size, relevant to models handling price fluctuations, nonstationarity, and bubble formations in financial ecosystems, including crypto ETFs and CBDC issuance.

Keywords: D53, E44, E51, E58

JEL Classification: Bubble, Diversification, Stability, Cryptocurrency, CBDC

Suggested Citation

Han, Jungsuk and Wang, Yenan, Multiple Rational Bubbles (October 2, 2023). Available at SSRN: https://ssrn.com/abstract=4590068 or http://dx.doi.org/10.2139/ssrn.4590068

Jungsuk Han (Contact Author)

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Finance Theory Group (FTG) ( email )

United States

Yenan Wang

Amsterdam Business School, University of Amsterdam ( email )

Roetersstraat 18
Amsterdam, 1018 WB
Netherlands

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