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Journal of Financial Economics Vol. 129 No. 2 2018

Extrapolation and bubbles

Nicholas Barberis1; Robin Greenwood2; Lawrence J. Jin3; Andrei Shleifer4

1 Yale University · 2 Dana-Farber/Harvard Cancer Center · 3 California Institute of Technology · 4 Harvard University Press

open access

Abstract

We present an extrapolative model of bubbles. In the model, many investors form their demand for a risky asset by weighing two signals—an average of the asset’s past price changes and the asset’s degree of overvaluation—and “waver” over time in the relative weight they put on them. The model predicts that good news about fundamentals can trigger large price bubbles, that bubbles will be accompanied by high trading volume, and that volume increases with past asset returns. We present empirical evidence that bears on some of the model’s distinctive predictions.

DOI
10.1016/j.jfineco.2018.04.007
Volume
129
Issue
2
Pages
203-227
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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