Journal of Financial Economics Vol. 89 No. 2 2008
Advisors and asset prices: A model of the origins of bubbles
Abstract
We develop a model of asset price bubbles based on the communication process between advisors and investors. Advisors are well-intentioned and want to maximize the welfare of their advisees (like a parent treats a child). But only some advisors understand the new technology (the tech-savvies); others do not and can only make a downward-biased recommendation (the old-fogies). While smart investors recognize the heterogeneity in advisors, naive ones mistakenly take whatever is said at face value. Tech-savvies inflate their forecasts to signal that they are not old-fogies, since more accurate information about their type improves the welfare of investors in the future. A bubble arises for a wide range of parameters, and its size is maximized when there is a mix of smart and naive investors in the economy. Our model suggests an alternative source for stock over-valuation in addition to investor overreaction to news and sell-side bias.
- DOI
- 10.1016/j.jfineco.2007.09.001
- Volume
- 89
- Issue
- 2
- Pages
- 268-287
- Language
- en
- Sources
- crossref bibtex:phds-export.bib openalex