Shakeouts and Market Crashes

Barbarino, Alessandro Teresio; Jovanovic, Boyan

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Shakeouts and Market Crashes

NBER Working Paper No. w10556

32 Pages Posted: 4 Jul 2004 Last revised: 6 Nov 2022

See all articles by Alessandro Teresio Barbarino

Alessandro Teresio Barbarino

University of Chicago - Department of Economics

Boyan Jovanovic

New York University - Department of Economics

There are 2 versions of this paper

Date Written: June 2004

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 positively sloped supply of capital to the industry. For the period 1971-2001 we fit the model to the Telecom sector.

Suggested Citation: Suggested Citation

Barbarino, Alessandro Teresio and Jovanovic, Boyan, Shakeouts and Market Crashes (June 2004). NBER Working Paper No. w10556, Available at SSRN: https://ssrn.com/abstract=557189