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Coordinated bubbles and crashes

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  • Zheng, Huanhuan
Abstract
In a market with information friction, investors strategically consider the actions of others and evolutionarily switch between fundamental and technical strategies to maximize their payoffs. The collective actions of all investors exert feedback on asset price, which affects investors’ subsequent actions. We find that investors have the incentive to adopt fundamental strategy to restore market efficiency only if the mispricing is sufficiently large. When investors fail to coordinate on the fundamental strategy, market inefficiency increases, which blows the bubble. As market inefficiency grows, the coordination on fundamental strategy strengthens, which eventually bursts the bubble.

Suggested Citation

  • Zheng, Huanhuan, 2020. "Coordinated bubbles and crashes," Journal of Economic Dynamics and Control, Elsevier, vol. 120(C).
    • Handle: RePEc:eee:dyncon:v:120:y:2020:i:c:s0165188920301421
    DOI: 10.1016/j.jedc.2020.103974
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    2. Chan, Joshua C.C. & Santi, Caterina, 2021. "Speculative bubbles in present-value models: A Bayesian Markov-switching state space approach," Journal of Economic Dynamics and Control, Elsevier, vol. 127(C).
    3. Dong, Feng & Jia, Yandong & Wang, Siqing, 2022. "Speculative Bubbles and Talent Misallocation," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
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    5. Zheng, Huanhuan, 2023. "Sovereign debt responses to the COVID-19 pandemic," Journal of International Economics, Elsevier, vol. 143(C).
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    More about this item

    Keywords

    Coordination games; Bubbles; Market efficiency;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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